Ahead of budget, new government looks well equipped to take India forward

At the helm of the announcement of the Union Budget 2014-15, businesses in India and foreign investors are anticipating immediate measures that will be set in a long-term framework.

Since the Narendra Modi-led central government took the oath of office on May 26 we have witnessed considerable positive action, amid tough decisions and controversies. Riding high on the nation’s expectations, a day after taking charge the government announced the formation of a Special Investigation Team to investigate black money stashed away in foreign accounts. A hopeful start and a strong message that underlined the government’s commitment to encourage a transparent and conducive environment for business and growth.

The country and the international community have pinned their hopes on this government. In one action-packed month, the new government has tried to justify its commitments to encourage economic growth. Bureaucrats have been directed to interact directly with the prime minister to ensure that valuable ideas and suggestions do not get lost in bureaucratic barriers. The government has also brought alive its “minimum government, maximum governance” mantra. Taking a step forward from his often repeated campaign catchphrases, Mr Modi discontinued four standing committees of the Cabinet. This step aims at reorganising and consolidating the ministers, which will help to expedite decision-making processes and usher in greater accountability in the system. Earlier bureaucratic deadlocks and the quagmire of approvals required to set up a business or industry had led to a decrease in the investors’ confidence.

At the helm of the announcement of the Union Budget 2014-15, businesses in India and foreign investors are anticipating immediate measures that will be set in a long-term framework. We understand that all expectations may not be met in the first budget. However, it will be crucial for the finance minister to roll out a definitive road map that will encourage investors’ morale. The biggest challenge will be to revive the growth momentum of the economy.

After many years India has a majority government, which is positive for both the domestic and international investor. The government has taken note of the fact that bolstering the manufacturing and infrastructure sector will be crucial to India’s long-term growth as it will provide impetus to the economy’s growth. It will need to accelerate the development of highways, railways, electricity and build better infrastructure (while continuing to update various key policies toward these sectors).

The government has already acted on this cue; it has recently disclosed plans to set up a finance corporation with a corpus of 1 trillion rupees (Dh60 million), in partnership with Japanese investors, to fund projects in the road sector. The Japanese partners are likely to have a 26 per cent stake in the corporation, with assured returns of 9 per cent.

Another key concern for investors is tax instability. To restore investors’ confidence and boost foreign inflows into the country, the government will need to simplify the tax regime, remove anomalies (eg retrospective amendments, clarity on accounting rules etc), and introduce an improved and faster dispute resolution mechanism that will make it easier to do business in India. Tax reforms such as the goods and services tax, the direct taxes code and administrative reforms suggested by Parthasarathi Shome will have to be addressed in a time-bound manner.

The tax-GDP ratio continues to be drastically low, despite past attempts to improve it. The increased use of technology in tax administration will definitely help to bring in non-taxpayers and unearth black money. Early introduction of goods and services tax will increase the tax base, augment revenue collections and eventually reduce costs. Customer-focused tax administration and recruiting additional manpower would be critical to provide better services to an increasing tax base. It may also be worthwhile to explore taxing the agricultural sector selectively by introducing measures such as income or asset threshold-based taxation or taxing income from selected high end crops. Aggressive targets could be set to garner additional revenues from non-fiscal sources, such as disinvestment of shareholdings in non-strategic public sector undertakings, telecoms spectrum, coal block allocation and dividends from public sector enterprises.

The investor community has already expressed confidence in the Modi-led government capability to spur growth and investment in the country. It has made it clear that it will avoid retrospective taxation and strive to provide stable fiscal policies and a legal regime so that foreign investors do not face any uncertainty. The idea is to change the investment climate and revive India’s image as an investment destination (which has taken a beating in the past decade.)

The government will need to work on a number of aspects to make ease of doing business in India a reality. For this they will need to work on the land acquisition act, labour reform and environment clearances. They would also need to open up the savings by holding necessary incentives to encourage savings. The current foreign direct investment regime needs a serious look and the government will do well to open up all sectors other than those which affect national security.

Everything said and done, this is an exciting time for the new government with opportunity and need juxtaposed against each other. Some tough calls in the past month indicate that this government most definitely gets it. What remains to be seen is how the ideas become policies and reforms that will put the sheen back on the investment climate of India Inc.

Richard Rekhy is the chief executive of KPMG in India and a member of the global board of KPMG International

Follow us on Twitter @Ind_Insights

Published: July 9, 2014 04:00 AM

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