Budget sends out clear message that India is open for business

The Indian finance minister Arun Jaitley has sought to provide impetus to the infrastructure, manufacturing and financial sectors in this year’s federal budget, making a valiant effort to live up to the twin promises of economic growth and good governance of the Narendra Modi government.

However, as prophesised, the budget does not have significant impact in the short term, although plans to revive the economic growth momentum are quite clear. Being aware of the fact that the finance minister had very little room to manoeuvre, the budget has promises to keep and miles to go.

The Indian economy had been passing through challenging times that culminated in lower than 5 per cent GDP for two consecutive years. With the expectation of better performance in manufacturing, improved balance of payments situation and modest global growth revival, the budget forecasts a GDP growth rate in the range of 5.4 to 5.9 per cent in the 2014-15 financial year.

While the estimated fiscal deficit for the current year has been sustained at 4.1 per cent of GDP, the revised target for succeeding years (3.6 per cent and 3 per cent respectively) reaffirm the government’s commitment of returning to the path of fiscal consolidation.

Envisaging the need for reinforcing the infrastructure, manufacturing and financial sectors, there are measures to refuel growth in these areas. Both fiscal and non-fiscal measures have been introduced to give impetus to these sectors.

The budget echoed the strong intention and spelt out the initiatives of the government to effectuate the ease of doing business in India. To energise investor sentiments, the government proposed a slew of measures providing clarity on taxability of the foreign portfolio investors in India, revamping the depositary receipts scheme and the introduction of single demat account for all financial transactions, among other measures.

Mr Jaitley has also devised a conducive tax regime for infrastructure and real estate investment trusts and provided them with other incentives to lure long-term investment from foreign and domestic investors.

Further, rules for foreign direct investment have been liberalised across several sectors including defence, insurance and real estate.

The finance minister in his speech assured that the government would not ordinarily create any future retrospective amendments in law. Additionally cases arising out of the retrospective amendments of 2012 (indirect transfers) will now be referred by a high-level committee.

The efficacy of such measures needs to be unravelled. The strengthening of the advance pricing agreement regime by introducing favourable provisions in law will reduce litigations and provide certainty to the investors.

The finance minister has also introduced a bouquet of reforms and incentives/duty concessions to grow the manufacturing industry. Certain welcome reforms have been introduced to fast-track customs clearances, reduce unwarranted litigation and strengthen alternative dispute resolution measures. These, if implemented in the true spirit, can play a critical role in making the tax regime more conducive to business.

On the introduction of a goods and service tax (GST), Mr Jaitley announced that a resolution on the issue between the central government and the states can be expected within this year. The industry, though, expected a more concrete announcement from the government with respect to the road map to introduce GST.

The budget can be viewed as a blue print of the long-term objectives of the Modi government. While it was difficult to fulfil the wish list of all the stakeholders, the finance minister seems to have taken bold decisions to try to bring the sluggish economy back on track. Besides, he has been successful in spreading the message of “India is open to business”.

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

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