<b>Claude Smadja</b>: A positive budget to be welcomed
FIIs registered a 33% increase last year and net FDI inflows increased from 1.7% of GDP
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Most observers were expecting that the 2017/18 budget would try to balance the priority of stimulating growth with the need to maintain fiscal discipline. In that respect, Finance Minister Arun Jaitley has mostly achieved his objective.
It was crucial for the government to help the economy recover from the shock created by demonetisation. However, this budget has avoided the risk of overshoot. The reduction of the taxation base for the lowest income categories and for the micro small and medium enterprises should translate directly into more consumption spending. The same applies to the measures announced to ease the situation of small farmers with the increase of agricultural credit, of money allocation to MGNREGA. The support announced for the construction of 10 million more houses for houseless people by 2019 goes in the same direction.
The budget deficit to GDP ratio which was 3.5 per cent, was originally planned to be brought back to 3 per cent, and is now forecast by the government to be at 3.2 per cent for this new fiscal year. However, this is a manageable slippage.
The increased investment on infrastructure development is also definitely good news as poor infrastructure remains a major obstacle to economic development and, in many cases, a deterrent for investors and for developing further some sectors.
In that respect, the emphasis put on the extension of broadband infrastructure and of fintech is not only much desired, but comes also at the right time to provide a much needed additional push for making Digital India a reality. However, the proof will be in the pudding, i.e. how consistently and how fast these measures will be implemented.
The same criteria will have to apply to the much welcomed measures announced to force more of the unorganised sector to come into the open economy by banning cash transactions beyond a certain amount and also to fight against corruption and for the cleaning up of the country’s political life by regulating and channeling the funding of political parties. If strictly implemented, the unprecedented measures announced by Finance Minister Jaitley could be a promising starting point to help India enhance its positioning as a destination for investors.
These investors will also be pleased by the abolition of the FIPB which was on the verge of obsolescence as the Board was becoming less relevant.
While this is definitely a positive budget whose impact should be strengthened by the implementation of the GST reform, a key reality test for its success will need to come in the coming months from the attitude and decisions from the country’s business community. So far, foreign investors have been more optimistic about India’s economic prospects than national investors; FIIs registered a 33 per cent increase last year and net FDI inflows increased from 1.7 per cent of GDP in the fiscal 2016 to 3.22 per cent of GDP in the second quarter of FY 2017, but domestic investment has been far below that performance.
Of course, one could always regret the fact that few new specific economic reforms were spelt out, but what would count will be the continuous stream of measures aimed at improving framework conditions for doing business, reducing bureaucratic hurdles and increasing the kind of predictability and transparency that investors crave. With demand expected to go up, the forecast growth rate of 6.75 to 7.5 per cent looks pretty much like a realistic one.
There is comfort and reassurance to be had from the way Finance Minister Jaitley has been able to walk a fine line in managing contradictory imperatives and avoiding any temptation of populist measures for political purpose given the forthcoming state elections. There is no doubt that while always hoping for more, investors will feel heartened in their perception that there is no bypassing – or under-evaluating – India in their global strategy.
It was crucial for the government to help the economy recover from the shock created by demonetisation. However, this budget has avoided the risk of overshoot. The reduction of the taxation base for the lowest income categories and for the micro small and medium enterprises should translate directly into more consumption spending. The same applies to the measures announced to ease the situation of small farmers with the increase of agricultural credit, of money allocation to MGNREGA. The support announced for the construction of 10 million more houses for houseless people by 2019 goes in the same direction.
The budget deficit to GDP ratio which was 3.5 per cent, was originally planned to be brought back to 3 per cent, and is now forecast by the government to be at 3.2 per cent for this new fiscal year. However, this is a manageable slippage.
The increased investment on infrastructure development is also definitely good news as poor infrastructure remains a major obstacle to economic development and, in many cases, a deterrent for investors and for developing further some sectors.
In that respect, the emphasis put on the extension of broadband infrastructure and of fintech is not only much desired, but comes also at the right time to provide a much needed additional push for making Digital India a reality. However, the proof will be in the pudding, i.e. how consistently and how fast these measures will be implemented.
The same criteria will have to apply to the much welcomed measures announced to force more of the unorganised sector to come into the open economy by banning cash transactions beyond a certain amount and also to fight against corruption and for the cleaning up of the country’s political life by regulating and channeling the funding of political parties. If strictly implemented, the unprecedented measures announced by Finance Minister Jaitley could be a promising starting point to help India enhance its positioning as a destination for investors.
These investors will also be pleased by the abolition of the FIPB which was on the verge of obsolescence as the Board was becoming less relevant.
While this is definitely a positive budget whose impact should be strengthened by the implementation of the GST reform, a key reality test for its success will need to come in the coming months from the attitude and decisions from the country’s business community. So far, foreign investors have been more optimistic about India’s economic prospects than national investors; FIIs registered a 33 per cent increase last year and net FDI inflows increased from 1.7 per cent of GDP in the fiscal 2016 to 3.22 per cent of GDP in the second quarter of FY 2017, but domestic investment has been far below that performance.
Of course, one could always regret the fact that few new specific economic reforms were spelt out, but what would count will be the continuous stream of measures aimed at improving framework conditions for doing business, reducing bureaucratic hurdles and increasing the kind of predictability and transparency that investors crave. With demand expected to go up, the forecast growth rate of 6.75 to 7.5 per cent looks pretty much like a realistic one.
There is comfort and reassurance to be had from the way Finance Minister Jaitley has been able to walk a fine line in managing contradictory imperatives and avoiding any temptation of populist measures for political purpose given the forthcoming state elections. There is no doubt that while always hoping for more, investors will feel heartened in their perception that there is no bypassing – or under-evaluating – India in their global strategy.
The writer is president of Smadja & Smadja