India: India’s Game-Changing Budget Puts Emphasis On Infrastructure

Last Updated: 10 March 2015
Article by Nitin Shingala

India's latest budget promised to bring a quantum leap to the country's economic growth; our local expert, and President of the Bombay Chartered Accountants' Society, gives his view.

The world is predicting India will overtake slowing China to become the world's engine of growth in the next decade. But India is not without its issues, and the hope of transforming the country lies on the shoulders of Prime Minister Narendra Modi's government elected with a  landslide victory nine months ago.

Last Saturday, India's Finance Minister Arun Jaitley presented his first full year budget with progressive growth-oriented and investment-friendly measures that look set to jumpstart the economy. It has been seen by many as the most important budget since the one that eventually liberalised the Indian economy in 1991.

The new budget could not have come at a better time. The falling oil price has provided India a rosy economic setting and it is expected to help in scoring its first current account surplus in 10 years. In the eye of Reserve Bank of India governor Raghuram Rajan, the oil plunge can be considered a US$50bn stimulus for the economy.

With that, the latest budget sees the government engage in a balancing act between managing the nation's fiscal deficits (delay of deficit target), spurring growth (increased infrastructure spending), reforming taxation (implementation of nationwide goods and services tax), diversifying the economy (Made in India initiatives), and revamping social welfare (new social security programs).

During the budget presentation, Mr Jaitley announced the country would postpone its deficit-trimming timeline to accommodate additional expenses to stimulate the economy. India will now take three years to achieve its fiscal deficit target, which is 3% of gross domestic product (GDP). In the 2015-16 budget, the deficit is lifted to 3.9% as opposed to the initial target of 3.6%. India is forecasting an 8%-8.5% growth in GDP with 5% inflation on the back of a US$288bn (5.7% higher than the previous year) budget.

India is banking on infrastructure to drive the nation forward. Leaders realise the country cannot be held back by the sorts of stalled infrastructure developments that have plagued the last decade. In fact, the annual railway budget tabled in parliament just two days before the fiscal budget saw India up its stake on infrastructure spending to a staggering US$137bn over the course of five years. Besides that, the country is allocating an additional US$11.3bn or 0.5% of GDP on transport, power, irrigation, health and education infrastructure to set the foundation for economic development. Mr. Jaitley specifically mentioned that five "ultra mega" power-generation plants would be constructed to facilitate the increasing energy demand brought by industrialisation and urbanisation.

In order to streamline the myriad state and federal taxes, the Indian government is rolling out a nationwide GST by April 2016. The implementation of this long-awaited, simplified uniform taxation system could immediately increase India's GDP by 2% through reducing the complexity of doing business in the country.

Also, the "wealth tax" on cash and property is to be abolished and replaces by a 2% income-tax surcharge on the "super rich" – individuals and corporates with annual income more than US$160,000. India's corporate tax will be gradually reduced from 30% to 25% over the four years from 2016-17 to counteract the government plan to eliminate various corporate tax exemptions.

Several initiatives in this budget are in line with Prime Minister Modi's "Make in India" campaign, aiming to promote India as a manufacturing hub. Mr. Jaitley announced the basic customs duty on 22 raw materials and components would be reduced to zero from 10% in a bid to minimise manufacture cost in the country. Mobile phones and tablets produced in India will also get at least a 10.5% duty advantage over imported products. In addition, the income tax and royalty fees for technical services will be lowered from 25% to 10% to encourage technology transfer.

Mr. Jaitley's budget has not forgotten the common people. Under his budget, a "universal social security" will be created to provide the millions of underprivileged in India a safety net in the form of insurance and pensions subsidised by the government. A state-sponsored insurance that covers up to 200,000 rupees (US$3,228) for accidental death will be made available for just one rupee (US$0.016) a month. Likewise, a new pension scheme will be introduced with the government matching account holders' annual contribution on a rupee-for- rupee basis for up to 1,000 rupees (US$16.17) for the next five years. The government also has plans to remove the nation's massive food, fuel and fertilizer subsidy gradually by distributing social welfare through direct cash payments into an individual's account to prevent leakages and corruption.

"It is India's chance to shine," Mr. Jaitley said in his budget presentation. And he is absolutely right. With more than 54% of its population under the age of 25 years, India is one of the world's youngest nations. The demographic dividend would enable the nation to outshine the rest of the world if structural reforms are carried out to liberalise the economy. Undeniably, PM Modi has shown his government's commitment to reform with the latest budget - but to unlock the nation's full potential, the devil is in the implementation.

Nitin Shingala has authored a paper looking at the details of the budget; download it here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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