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Jaitley presents a growth-oriented Budget
Falling just short of big bang reforms called for by his own economic survey, Finance Minister Arun Jaitley on February 28 presented a Rs.17.78 lakh crore (nearly $300 billion) national budget for the next fiscal that seeks to put more money in the hands of the average citizen, tackle the menace of black money more effectively and end an era of “scam, scandal and corruption”. In his 93-minute budget speech in the Lok Sabha, the finance minister said a new law on black money stashed abroad will call for an imprisonment of up to 10 years on its perpetrators with a penalty of 300 percent, while another proposed legislation will clamp down on benami property in India with both confiscation and prosecution. This apart, the 62-year old lawyer-politician also proposed a new public procurement law for the consideration of the house that can encourage transparency in the way government buys goods and services while removing the reluctance in decision-making among the bureaucracy due to the fear of being questioned later by probe agencies. The finance minister said while individual tax payers would stand to gain as much as Rs.440,200 by way of enhanced exemptions he has proposed in his two budgets since July last year, the corporate sector can benefit from a cut in tax rates from 30 percent to 25 percent over four years, albeit with a sharp reduction in the exemptions. The other highlights of Jaitley’s budget include universal social security with health insurance coverage for the poor, a new bankruptcy law, a fresh gold monetisation scheme, the deferment of much-criticised General Anti- Avoidance Rule by two years with prospective effect, a pan-India goods and services tax regime from April 1, 2017, taxfree bonds to fund rail, roads and irrigation projects and five new ultra mega power projects. Prime Minister Narendra Modi hailed the budget as progressive and practical which delivers on job creation, equity and growth. “Union budget 2015 is a budget with a clear vision. It is a budget that is progressive, positive, practical, pragmatic and prudent,” Modi tweeted. Industry, too, welcomed the proposals and said it will encourage investment with a better environment for doing business. The emphasis on infrastructure, agriculture, manufacturing and rural economy was particularly welcomed. Regarding radical liberalisation suggested by the economic survey, Jaitley sought to give an explanation. “People who urge us to undertake big bang reforms also say that the Indian economy is a giant super tanker, or an elephant. An elephant, Madam Speaker, moves slowly but surely. Even our worst critics would admit that we have moved rapidly,” he said. Among the various welfare programmes, the finance minister outlined a new student loan scheme for higher education, Rs.8.5-lakh credit for farmers, significant hikes in the allocations for women safety, rural job guarantee scheme, and mid-day meal programme, a new pension fund and several skilling schemes for the youth. He also made several references to two of Prime Minister Modi’s pet projects, and said while policies outlined by him and various tax proposals were aimed to giving an impetus to “Make in India” campaign, particularly aimed at the youth and manufacturing, he also announced 100-percent tax rebate on money spent by the corporate sector towards the Swachh Bharat Abhiyan. In the realm of taxation, Jaitley said wealth tax will be abolished, with a cess, instead, on the super rich, the service tax rate hiked, exemption limits for individual tax-payers significantly enhanced, notably in areas like insurance, excise and customs duty rationalised and corporate tax rate cut over four years from 30 percent to 25 percent, with the removal of a host of exemptions. “My direct tax proposals would result in revenue loss of Rs.8,315 crore, whereas the proposals in indirect taxes are expected to yield Rs.23,383 crore. Thus, the net impact of all tax proposals would be revenue gain of Rs.15,068 crore,” the finance minister said, while also earmarking a target of Rs.41,000 crore from divestment of stake in state-run enterprises. At the same time, the finance minister said that he was not losing sight of financial discipline, sticking to the fiscal deficit target of 4.1 percent of GDP for the current fiscal and 3.9 percent for the next, and pruning it further to 3.5 percent and 3 percent over another two fiscals. This, despite a near 6 percent increase in the total expenditure at Rs.1,777,477 crore for the next year over the revised estimates for the current fiscal. But the size of plan expenditure, which forms the more productive use of finances, has been cut marginally by 0.5 percent to Rs.465,277 crore. The finance minister began his speech on a positive note on the India economy and said it was logging the fastest growth among larger countries, with inflation easing significantly over the past year. He was also quick to take this credit for his government. Through the day, key stock market indices fluctuated wildly, after opening in the green. The sensitive index (Sensex) of the Bombay Stock Exchange (BSE) opened nearly 200 points, or 0.7 percent higher, but went into the red with a loss of nearly 340 points over the previous close. Intra-day, the fluctuation was as wide as nearly 530 points. But by the end of the day, the 30-share key index managed to float back into positive territory with a gain of around 140 points, or nearly 0.5 percent over the previous close. The case was the same with the broad CNX Nifty of the National Stock Exchange (NSE), which finally ended with a gain of 0.65 percent.
Progressive budget which delivers on growth: Prime Minister Modi
Prime Minister Narendra Modi on February 28 hailed the Union budget as progressive and practical which delivers on job creation, equity and growth. “Union budget 2015 is a budget with a clear vision. It is a budget that is progressive, positive, practical, pragmatic and prudent,” Modi tweeted. “Budget 2015 has a distinct focus on farmers, youth, poor, neo-middle class and the aam nagrik (common man). It delivers on growth, equity and job creation,” he said. “From housing for all, jobs, health, education and total electrification, FM (finance minister) laid down goals to be achieved by 2022, India’s Amrut Mahotsav.” “Budget is investment friendly and removes all doubts on tax issues. It assures investors that we have a stable, predictable and fair tax system,” Modi said. “I congratulate FM for doing an excellent job in respecting aspirations of the states and at the same time delivering on
national priorities,” Modi added.
Economic Survey says double-digit growth possible, inflation easing
India’s Economic Survey has projected growth at over 8 percent for the next fiscal and said inflation was easing while setting the agenda for “big-bang” reforms to further drive expansion, prune wasteful expenditure and promote investments in a green way. Tabled in parliament on February 27 by Finance Minister Arun Jaitley and authored by a team led by Chief Economic Advisor Arvind Subramanian, the annual report card on the state of the economy said the growth should now rise further and double digit expansion was a possibility. But it also had a caveat. “The growth estimates of over 8 percent for the year is on expectations that the monsoon will be favourable, as it was forecast to be normal, compared to last year,” it said, adding that such an expansion was necessary to address poverty. “Double-digit growth can help in ‘wiping every tear from every eye’ and realising the aspirations of India’s youth,” the survey said, indicating this should also be an easier task for the government now with a clear political mandate for reform and a benign external environment. “Decisive shifts in policies controlled by the Centre combined with a persistent, encompassing, and creative incrementalism in other areas could cumulate to ‘Big Bang’ reforms.” It said Gross Domestic Product (GDP) growth in 2012-13 was 5.1 percent, which increased to 6.9 percent in 2013-14 and was now expected to further increase to 7.4 percent in 2014-15, as per advance estimates available with the government. On the intended green actions, the survey said while the shift from a carbon subsidisation regime to one of taxation and from negative pricing on emissions to putting an implicit positive price was welcome, there was still a long way to go on reform of coal and petroleum pricing. On inflation, the survey said, there has been a fall of over 6 percentage points since 2013, even as the external sector, which includes exports and inflow of foreign funds, was returning to a path of strength and resilience. Industrial growth has also picked up now. It also had some good news to report on the farm sector. “Foodgrain production for 2014-15 is estimated at 257.07 million tonnes and will exceed that of last year by 8.5 million tonnes.” It also called for three incremental steps to create a national national market for farm produce: Removing fruits and vegetables from list of regulated goods, policy support from states to create alternative or special markets in private sector, and liberal policy for foreign investment. The survey noted with concern the fall in productive investment in India in recent years. It said investment rate over the past years, as measured by gross capital formation (GCF) as a percentage of GDP declined from 38.2 percent in 2011-12 to 32.3 percent in 2013-14. It also made a case for rationalisation of subsidies and said such doles did not appear to have had a transformative effect on the living standards of the poor. On the fiscal side, it said the government was committed to consolidation with revenue generation a priority. The survey said a close look at price subsidies, which are estimated at around Rs.3,78,000 crore, or 4.24 percent of GDP, reveal that they may not be the government’s best weapon for fighting poverty. Importantly, it also observed that the current subsidy regime indicates that rich households benefited more from such doles than the poor. Among various examples it dwelt upon for this conclusion, it said that subsidy on electricity can only benefit the relatively rich. At the same time, the survey said, eliminating or phasing out subsidies was “neither feasible nor desirable” and said the “JAM” trinity -- Jan Dhan Yojana, Aadhar cards and mobile phones -- will allow the government to deliver such doles in a targeted and less-distorted manner. The survey also dwelt on Prime Minister Narendra Modi’s pet project “Make in India” and said this key policy objective can be achieved by deciding what to make, giving priority to services and making some structural transformation in the skill sets of the labour force. Equally important, it noted, was the removal of distortions that were preventing manufacturing to become an engine of economic growth, such as those in labour markets, capital markets, the land market and lack of sync between need for skilling and comparative advantage of labour force.
Defence sector to be opened soon for lobbyists, agents
For greater transparency in defence deals, the government will soon open up the sector for lobbyists/agents, with the rider that companies will be heavily penalised if they violate stringent conditions, including disclosure of consultancy fee paid to their agents. Inter-ministerial consultations are on to finalise a revamped defence procurement policy by April, and the norms on defence lobbyists/agents /middlemen are expected to be part of this policy, official sources told FE. However, the government has decided that blacklisting of firms will be reserved only for the rarest of rare cases. This was because the UPA government had blacklisted as many as 12 firms, severely restricting the options of defence forces to source equipment and spare parts. Currently, many defence companies covertly use agents to strike deals, but they wash their hands off the agents’ activities in case of wrongdoing. According to defence ministry sources, the new norms will make it mandatory for companies to disclose the names of agents and the agency fees paid every year till the end of the contract. The norms will also specify that the nature of the relationship between the company and its agent will have to be included in the contract signed with the government. This is to ensure that companies can be held responsible for the acts of agents including bribery and other illegal acts. Firms failing to make such disclosures will have to pay a huge penalty in addition to the contract amount. Such companies and their officials would also face criminal charges. “The agent’s fee or consultancy will have to be declared in advance. Also, companies must inform the defence ministry within 15 days if they hire an agent or change consultants midway into negotiations,” said an official. “What is expected to be finalised at the meeting is a graded system of penalty depending on the enormity of the violation. The idea is to make violations prohibitively expensive so that there is no inducement to violate the conditions,” he added. The proposed changes in policy follow the new found pragmatism in the government as the action taken against companies by the previous government severely hit defence preparedness. Citing an example — of “blacklisted” Tatra Sipox, the company that supplies specialised vehicles on which nuclear and other missiles are mounted and carried — about 10 % vehicles had to be grounded because of lack of spares, as investigations dragged on. Defence minister Manohar Parikkar finally allowed the forces to negotiate with another independent Tatra-Sipox entity that was not involved in the alleged wrongdoing.
Naidu invites Japan to invest in Andhra capital
Andhra Pradesh Chief Minister N. Chandrababu Naidu has invited Japanese firms to invest in the development of the new state capital and in various sectors which offer huge opportunities. He promised the investors faster clearances, allotment of any amount of land, round-the-clock electricity supply, water and hassle-free business environment. Naidu was addressing a seminar on “Expanding technology cooperation for smart community in Andhra Pradesh”, organized by the New Energy and Industrial Technology Development Organization (NEDO) and Ministry of Economy Trade and Industry (METI), government of Japan. About 100 Japanese delegates from 40 companies attended the seminar organised as a follow-up to Naidu’s visit to Japan. Naidu made a presentation on the investment opportunities in the capital region and also the special initiatives by his government to ensure ease of doing business. The chief minister highlighted investment opportunities for Japanese investors in world-class capital city, smart villages, smart wards, renewable energy and energy efficiency. He said the capital city, whose master plan is being developed by two companies from Singapore, would be a smart city. He urged the Japanese firms to invest in various elements of smart cities like efficient use of water, clean energy, intelligent transport systems, smart governance and environment. Naidu said the capital city being developed in Guntur and Vijayawada offers investment opportunities of $30 billion in the next decade. He said metropolitan region of 7,068 sq km would have world class urban smart infrastructure facilities including world’s largest ring road of 180 km. Naidu asked the delegates to explore the opportunities for collaboration in urban infrastructure, manufacturing, agriculture, food processing and IT. He promised dedicated industrial townships and industrial clusters for Japanese investments, single desk for all clearances and tax reforms to boost investment sentiments. Naidu said Andhra Pradesh with 974 km coastline is strategically positioned to attract investment and become the logistics hub of southeast Asia. He said the state with rich natural resource base and English speaking human resources offers tremendous investment opportunities. He said Vijayawada and Visakhapatnam would be global cities of the future. Akio Isomata, Minister, Embassy of Japan in India, said 1,200 Japanese firms had their presence in India. He, however, said they were facing various problems relating to tax, regulations and infrastructure. He said the Japanese investors were directly dealing with the states to overcome these problems. He was all praise for Naidu’s leadership and vision.
NSE plans international exchange at GIFT SEZ
National Stock Exchange of India Ltd (NSE) has announced it is setting up an international exchange in a special economic zone (SEZ) being developed as the country’s first International Financial Services Centre (IFSC) by Gujarat International Finance Tec-City Co. Ltd (GIFT). The announcement comes ahead of the Union Budget which is expected to detail guidelines for IFSCs, which could facilitate offshore banking, currency convertibility and incentives to insurance and other financial services companies to operate from the SEZ, Mint reported on 12 January. NSE’s agreement with GIFT, signed on February 26, involves the setting up of an international bourse that will offer trading in equities, interest rates and currencies among other asset classes. This comes around a month after BSE Ltd signed a similar deal with GIFT, entailing an investment of Rs.150 crore. The two exchanges will work towards moving the centre of gravity of key trading segments back to India. “In the absence of an IFSC in India, India has lost roughly 50% market share in the two most important India-related products: with rupee and Index being mostly traded on foreign platforms instead of onshore trading in such products,” a GIFT statement released on 12 January had said. Chitra Ramkrishna, managing director (MD) and chief executive officer (CEO), NSE, said: “We at NSE would like to be a part of the vision of the government to develop an international financial services centre in India. This will help the nation compete with other similar destinations. This will allow Indian and international entities to deal in financial products and services from India, making GIFT-India as one of the foremost international financial centres in the world. Ramkrishna said details like investment amount or the scale of operation will be worked out soon, with the new rules to finance SEZs expected soon. GIFT, one of Prime Minister Narendra Modi’s pet projects when he was chief minister of Gujarat and now projected as the first of 100 smart cities the government plans to build across India, is seen as India’s reply to the international finance centres of Dubai, Singapore and Hong Kong. It is estimated that GIFT will provide 500,000 direct, and an equal number of indirect, jobs, which would require 62 million sq. ft of commercial, residential and social facilities, with a total investment of about Rs.78,000 crore over the next 10 years. GIFT Co. is a 50:50 joint venture (JV) between Infrastructure Leasing and Financial Services Ltd (IL&FS) and the state government-owned Gujarat Urban Development Co. (GUDC). Of the 880 acres allotted to GIFT City, about 250 acres is earmarked for the IFSC. This will be treated as an SEZ. Ramakant Jha, MD and group CEO, GIFT City, said, “We welcome NSE at GIFT City to establish an international exchange. With the operating guidelines being issued by the ministry of finance, government of India, for IFSC, our aim is to make GIFT at or above par with other globally benchmarked financial centres. This MoU (memorandum of understanding would help in attracting various international services and, thereby, create an eco-system for operation of an international exchange in the country. The government, in consultation with the Reserve Bank of India, may also have to tweak the Foreign Exchange Management Act (FEMA) to accommodate the special needs of an IFSC. The National Institute of Public Finance and Policy (NIPFP) submitted a concept note to the ministry of finance on 6 February detailing the objectives and the policy framework for setting up finance SEZs in India. The 21-page report, titled Policy Framework for Finance SEZ, highlights the steps and short-term actions that may be adopted to start a finance SEZ. It suggests that till the time the Indian Financial Code (which would provide a comprehensive framework for a world class financial system) is not enacted, a specialized law for a financial SEZ can be passed. Another alternative, it says, is to notify new guidelines as per the SEZ Act, 2005, as applicable to a finance SEZ. The rationale for such a project, the concept note says, is the fact that an estimated Rs.1,334 crore per day, or Rs.2 trillion per year, for trading in rupee derivatives trading, is going to locations outside India. The report proposes exchanges based in such SEZs can compete for global customers with the GCX in Dubai or the SGX in Singapore. The report suggests that taxation inside a finance SEZ has to be rationalized. GIFT’s Jha is also hoping for an alternative dispute resolution system, similar to the special court in Dubai financial service centre. Pradip Shah, who runs IndAsia, a corporate finance, private equity, and investment advisory, says that IFSCs will give a huge boost to the nation’s gross domestic product. He said that 12-13% of the UK’s gross domestic product (GDP) comes from financial services, the highest such measure in all G7 economies. Ireland set up an IFSC in 1987 and it employs 32,700 people directly and contributes 7.8% to the Irish GDP, added Shah, who was the founder-managing director of Crisil Ltd, India’s first and largest credit rating agency. He also assisted in the founding of Housing Development Finance Corp. Ltd (HDFC), India’s first retail housing finance company, in 1977. The US offers Delaware as a convenient location for registering firms—945,000 are registered there, generating revenues of such a scale that Delaware levies no sales tax. Switzerland, according to Shah, manages $2.1 trillion of offshore money; Britain and its Channel/Caribbean islands manage $1.9 trillion, while Singapore has $1.3 trillion of offshore assets under its care.
Loans could become cheaper as India’s central bank cuts keys rates
Housing, auto and commercial loans could become cheaper with the Reserve Bank of India cutting key lending rates by 25 basis points in an unexpected move on on March 4 as it expected inflation to soften further, sending stock indices soaring during the bulk of the day. Getting some positive cues from the national budget tabled last week, and sensing an sustained economic recovery, the repurchase (repo) rate has been cut to 7.5 percent from 7.75 percent and the reverse repo rate has been adjusted to 6.5 percent from 6.75 percent. The cuts follow a far-reaching agreement between the government and the Reserve Bank of India (RBI) on Monday, under which the central bank will aim to bring the country’s retail inflation below the 6-percent mark by January 2016 and to around 4 percent by the end of 2016-17. The repo rate is the interest commercial banks pay for borrowing money from the central bank to meet short-term fund needs. The reverse repurchase rate is the interest central banks pays on short-term funds parked with it. A cut makes borrowing money cheaper for commercial banks. The announcement, which came just ahead of the opening bell for stock markets, brought much cheer to sentiments, prompting the sensitive index (Sensex) of the Bombay Stock Exchange to open nearly 345 points higher, over the previous close at 29,593.73 points. The key index soon breached the 30,000-point mark to touch a historic high of 30,024.74 points. The situation was similar at the National Stock Exchange, where the Nifty also hit an all-time high. But both indices came under a major spell of profit-taking during the last one hour of trading and ended in the red, losing between 0.72 and 0.82 percent as per provisional data. For the 30-share Sensex, it means an intra-day fluctuation of some 735 points. Industry, too, welcomed the rate cuts, the second such downward revision in two months, even as some commercial banks, led by the largest private sector lender, the State Bank of India (SBI), indicated that they could pass on the rate cuts to their customers. The finance ministry lauded the decision and said it was a vote of confidence on the steps taken by the government on fiscal consolidation and would lower the cost of loans for people at large. “More rate cuts will depend on future data,” Minister of State for Finance Jayant Sinha said. “To summarise, softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 percent in the second half,” Reserve Bank of Governor Raghuram G. Rajan said in a statement. “The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative,” said the governor who has otherwise been taking a rather conservative approach in dealing with the monetary policy, especially the interest rates. “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.” In its monetary policy statement of Jan 15, 2015 the Reserve Bank had reduced the repo rate by 25 basis points, and said: “Key to further easing are data that confirm continuing disinflationary pressures.” But it maintained its interest rate stance in its sixth bi-monthly monetary policy statement of Feb 3 in the absence of new developments on inflation or on the fiscal outlook, awaiting signals on that count and from the national budget. While the next bi-monthly policy statement will be issued April 7, 2015 the still weak state of some sectors and the global trends, prompted the central bank, in its own admission, to become more anticipatory to make changes immediate in its stand. In his statement on Wednesday, Rajan also lauded the Central Statistics Office (CSO) for the changes it made in the national income accounting, on which is based the country’s gross domestic product estimation, to bring it up to international standards. “Yet the picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as anecdotal evidence on economic cycle,” he said. “Nevertheless, the picture of a steadily recovering economy appears right,” he added. “Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 percent (plus or minus 2 percentage points) provided for in the agreement, that is to 4 percent by the end of a two-year period starting fiscal year 2016-17.”
Core industries grew at 3.9 percent in January
India’s eight core industries such as coal, electricity, crude oil, cement and steel, grew at 3.9 percent in January 2015 compared to a growth of 6.5 percent during the corresponding month of last year, official data showed on March 2. The index of eight core industries with a combined weightage of 37.90 percent in the Index of Industrial. Production (IIP) stood at 174.8 in the month under review, the ministry of commerce and industry said in a statement. Electricity generation, which has 10.32 percent weightage in the IIP, grew at 6 percent in January 2015 from a growth of 4 percent in the same month of the previous year. Cement production grew at 3 percent in January 2015 from an increase of 7.7 percent in the corresponding month of last year. Steel production was up 10.3 percent from a rise of 4.1 percent in January 2014. Coal sector grew marginally by 1.3 percent from 4.6 percent growth during the corresponding month of last year. Refinery products increased by 1.5 percent from a rise of 29 percent during January last year. The fertilizers sector too increased by 1.5 percent from a deceleration of 3.4 percent in the corresponding period of last year. However, two out of the eight core industries registered negative growth during January 2015. Crude oil output was lower by 0.2 percent in the month under review from a fall of 0.6 percent in output during the like period of 2014. Natural gas production fell 13 percent from a deceleration of 14.5 percent in the corresponding month of last year. The IIP, the barometer for measuring industrial output, had increased by a marginal 1.7 percent in December 2014.
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