India’s budget would do best to support its business environment

India’s finance minister Arun Jaitley might opt for a flexible fiscal deficit target for the next financial year and raise the disinvestment target. Chandan Khanna / AFP

The main focus of Wednesday’s Indian budget is likely to be boosting discretionary spending and employment generation, as the government’s decision to withdraw high-value currency notes (known as demonetisation) has put pressure on the economy. While the economy has the potential to recover from this slowdown, providing policy support now would make that potential recovery even stronger and broader. Special attention might be given to improving the business environment by simplifying regulations, pushing ahead with the reform agenda and adding predictability and simplicity to the tax regime.

A major concern has been the prolonged weakness in private investment, which has to pick up for the country’s economic development to be sustainable. Since low capacity utilisation is among the factors that are believed to be forcing Indian companies to hold back on capital expenditure, a positive demand shock is needed. This calls for higher capital outlay towards infrastructure development and measures to put more money in the hands of consumers.

Also, lowering the corporate tax rate below 20 per cent – it is now around 30 per cent – together with the implementation of a goods and services tax (GST) would not only boost domestic business confidence and job creation but also facilitate stable foreign capital inflows.

Additionally, the budget is likely to shed light on the government’s stance on the long-term capital gains taxation regime by clarifying whether it wants to tweak the holding period for gains or increase tax rates.

Since financing infrastructure development requires fiscal space, the finance minister, Arun Jaitley, might opt for a flexible fiscal deficit target for the next financial year and raise the disinvestment target. The current financial year’s deficit target is 3.5 per cent and the government is on track to meet it.

Bringing India’s rank within the top 50 in the World Bank’s Doing Business Report, as the government envisages, requires more policy initiatives. India is currently ranked 130, versus 131 the year before.

Measures such as encouraging competition among states to attract investment and setting up a dedicated task force in each department to monitor the reform process are well thought out, and the budget is likely to signal to more initiatives aiming at improving ground-level implementation. It must also stress on swiftly addressing disputes related to public and private partnerships (PPP) to unclog stalled projects.

The MSME (micro, small and medium enterprises) sector is an important job creator and needs cheaper capital and easy regulations. Additionally, the government’s campaign to boost start-ups should be given a renewed push, especially as start-ups will play a key role in creating jobs in the coming years. Measures needed to encourage investment and innovation in the service sector, so as to enable players in the industry to further improve the quality of delivery.

While demonetisation set the tone for a strengthened digital agenda, the budget must bring about a plethora of incentives to make digital transactions a way of life for citizens. Measures must target the digitalisation of mass payments such as salaries, health care and education. The budget must present clear signs that last-mile connectivity and cyber-security will be augmented markedly, so digitisation can become attractive to individuals and corporations alike. Initiatives should aim to promote digital as the easiest, safest and most ecological way of transactions.

The rural economy is vital to enable India’s long-term growth targets. And agriculture, being the backbone to more than half of rural households, needs to be the prime focus for the government’s plans for the coming fiscal year. Cheaper access to finance, augmented infrastructure and the arrival of technology must be prioritised.

Modern seed technologies and agricultural biotechnology have been embraced by several Asian economies, such as Japan and Malaysia. India should aim to make strides on these areas. This requires incentivising agriculture research by public and private institutes. Such initiatives might lead to new agricultural intellectual property, less dependence on imported seeds and stronger agricultural manufacturing. Thus one can expect the budget to lay greater emphasis on agriculture research and development.

The social sector should also receive special attention. Public expenditure on health and education has to be increased substantially to expand the health cover for the population, and to modernise and otherwise improve India’s education system. The budget might also include higher allocation for skill development.

In sum,Wednesday’s budget is likely to emphasise a better business environment, quality infrastructure, a stable tax regime and an adequately funded social sector, which are imperative for long-term growth.

Richard Rekhy is the chief executive of KPMG India

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