The Union Budget 2016-2017 is “a very balanced budget which looks at infrastructure growth and social sector reforms” but it does not contain “big bang announcements” for the corporate sector.
Those are the views of KPMG in India CEO Richard Rekhy who gave an interview to Asia House during a trip to London.
Mr Rekhy explained it was a budget for the overall development of India, rather than specifically geared at the corporate sector, but that it did have lots of ‘hits’ which would boost growth and consumption.
Nine pillars were addressed, he explained, namely agriculture and farmer welfare; the rural sector; infrastructure investment; the social sector; education, skills and jobs creation; financial sector reforms; governance, reforms and ease of doing business; fiscal discipline and tax reforms. The budget aimed to bolster India’s long-term economic potential by boosting infrastructure growth and creating a conducive business environment, he explained.
One of the highlights of the budget was the fiscal discipline that Indian Finance Minister Arun Jaitley had demonstrated, he added.
“The Government is on course to meet this year’s fiscal deficit target of 3.9 per cent and Mr Jaitley has set a fiscal deficit target of 3.5 per cent by March 2017 sticking to the roadmap set earlier. This gives the Reserve Bank of India (RBI) a lot of headroom to proceed with monetary easing measures and thereby put impetus into the economy,” Mr Rekhy said.
When asked whether Mr Jaitley should have strayed away from the path of fiscal prudence and increased the fiscal deficit to boost growth, Mr Rekhy said: “If the fiscal deficit is not being met because of investments then it’s not a bad thing – if those investments produce revenues. The challenge is the money has to be used in productive investments.”
But he said he anticipated the RBI repo rate to be cut “very soon” which would anyway boost investment and consumption.
The hike in pay for government employees announced in the Seventh Pay Commission would also help boost consumption in India and help increase tax collections, he said.
The Indian economy is expected to expand by 7.5 per cent this year.
Inflation in India is now below six per cent thanks to the drop in crude oil prices. “Now that we are on course to meet the fiscal deficit target and inflation is under control, we expect the RBI to bring interest rates down – that will reduce rates for the banks. However, banks need to fully pass on the rate cuts to borrowers,” he said.
As for why petrol prices remain high despite crude oil being at an all-time low, he said: “The Government added excise taxes to petrol prices to fund infrastructure, hence the retail price has not fallen despite falling oil prices by half.”
Another ‘hit’ of the budget in his view was the decision to pump much more money – a whopping Rs 38,500 crore – into the rural job scheme the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). This is an increase of 11 per cent on 2015-16.
“This is the highest allocation by the NDA-led government to date and is likely to boost rural consumption,” he pointed out.
“A substantial push was given to the rural sector with a focus on rural infrastructure development,” he added.
FDI in multi-brand retail remains at 51 per cent in India but states have the authority to take a final call. Currently only 11 states and two Union Territories allow FDI in multi-brand retail.
Allowing 100 per cent FDI in the marketing of food products produced and manufactured in India was the big FDI announcement in this budget. This is expected to greatly help farmers who have been badly affected by two years of droughts and unseasonal rains.
“Now would be a good time for Western companies in food processing to enter India,” Mr Rekhy said. As for whether there will be any restrictions as there are with multi-brand retail, he said: “The rules are yet to come out and we hope they will be investor-friendly.”
Girish Vanvari, KPMG in India’s National Head of Tax, who was also present in the interview, agreed, saying: “This is a huge opportunity as it means a foreign company could take over making all the sandwiches and snacks for a popular chain like Starbucks in India.”
The announcement of an ecommerce portal for farmers and the agriculture sector was another attractive element of the budget. “Now with that, the farmer can get better returns for his produce,” Mr Rekhy said.
The budget includs FDI liberalisation in a host of other sectors too. For instance, 100 per cent FDI will now be allowed in Asset Reconstruction Companies (ARCs) via the automatic route and norms governing overseas investment in Non Banking Financial Companies (NBFCs) will be relaxed. The Foreign Portfolio Investor (FPI) limit in public sector enterprises has been hiked to 49 per cent.
Increases in FDI into the defence and insurance had already been allowed by this Government. This budget further relaxed FDI norms for insurance by allowing overseas investment without prior Government approval, he pointed out.
“India has a pretty competitive FDI Policy already. Barring a few areas like multi-brand retail, defence, insurance etc., FDI is freely allowed in most of the sectors,” Mr Rekhy said.
He said there had been strong interest from Western companies in India’s defence sector since the FDI limit was raised and some Western companies had big defence orders already. As for non-Indian corporate interest in insurance he said “foreign insurance companies are looking at India and some already present have increased their limits, but not all.”
Mr Rekhy pointed out that a considerable amount – namely Rs 2.21 lakh crore (approx. USD 33 billion) – was allocated for infrastructure in the budget which would also be very attractive to the corporate sector. Combined with the Rail Budget, a total Rs 2.18 lakh crore (approx. USD 32.5 billion) would be spent on building roads and investment in the railways. In 2016-2017 50,000 kms of State Highways will be converted into National Highways. The total allocation for the road sector is Rs 97,000 crore (approx. USD 14.5 billion), including rural roads. This will help unclog stalled road projects.
Mr. Rekhy pointed out the budget also aims at encouraging private sector participation in infrastructure projects by revamping the existing PPP (public private partnership) framework.
The Government had already announced plans to redevelop 400 railway stations through PPP in the Rail Budget.
“New trains and routes have been announced and a total of 500 stations will have free Wi-Fi access, enabled by Google by the end of 2017,” Mr Rekhy said.
India is aligning itself with international tax regimes by bringing in BEPS (Base erosion and profit sharing) provisions, country-by-country reporting and tax liberalisation, he added.
There were, for example, interesting plans announced to boost Government revenues such as a six per cent so-called ‘equalisation levy’ to be imposed on the ecommerce transactions of non-residents which was inspired by the UK’s diverted profit tax as suggested in the OECD/G20 BEPS final reports.
In this budget, it was clarified that capital gains tax will be 10 per cent for foreign companies when they transfer unlisted companies and shares – bringing their tax to the same level as the tax Indian companies pay.
“India is committed to lowering tax rates of corporates and phasing out tax holidays and this government is going in the direction of lowering the corporate tax rate to 25 per cent from 30 per cent which was declared in the last budget,” he said. The phasing in of the new rate – which is designed to attract FDI – is yet to be announced.
Another highlight of the budget was the announcement of various initiatives to improve the ease doing business in India.
There was a proposal to make various amendments to the Companies Act, including a provision to allow new companies to register in a single day, which would be a boost to entrepreneurs, Mr Rekhy said.
He said whilst the budget stated that startups would be exempted from taxes in three years of their first five years “startups don’t make money in the first few years anyway.”
“They could have done more to encourage the SME sector,” he said. But he said the tech sector did not need any further incentives. “The tech sector is already doing well and they have had many incentives over the years.”
The Insolvency and Bankruptcy Bill 2015, which would enable people to wind down companies much more easily, is awaiting Parliamentary approval, Mr Rekhy pointed out.
The budget also announced the creation of International Financial Service Centres as tax free zones to encourage non-Indian residents to set up stock exchanges and financial centres.
“They would pay nothing on transactions but just a nine per cent tax. Normally companies pay 30 per cent, he said.
Misses in the budget
The big ‘miss’ in the Union Budget was the lack of a mention of GST (Goods and Services Tax) according to Mr Rekhy.
“The GST (Goods and Services Tax) has no distinct roadmap,” he said.
Mr Rekhy said the Finance Minister may not have mentioned it as the public knew it was coming at some point or the other and he had no clear date. “The ruling Government lacks a majority in the Upper House and hence needs to build a consensus with opposition parties in order to pass crucial bills like this,” he explained.
This tax is expected to boost India’s GDP by around one to two per cent and create a level playing field between local players and foreign companies.
“The GST will benefit multinational companies (MNCs) as it will create efficiency in the supply chain and allow businesses to concentrate on doing business in India. It will also create a more level playing field for MNCs who will no longer have to compete with the lower prices of businesses in the unorganised sector,” Mr Rekhy said.
Once GST is introduced, permits will no longer be required for the interstate movement of goods making transportation much more efficient and rationalised, he added.
The rate of the tax has not yet been set. “Different numbers have been floating around but in the long term it will bring prices for consumers down,” Mr Rekhy said.
‘The Goods and Services Tax will be a game changer’
“GST is the biggest game changer for the global community at large. That is why some communities don’t want it because it will prevent them from continuing tax evasion,” Mr Vanvari explained.
While the budget did include some measures to boost India’s manufacturing activity, more needs to be done in order to achieve the Government’s dream of transforming the country into a leading manufacturing hub – as envisaged in Narendra Modi’s Make in India initiative, Mr Rekhy said. Ten per cent tax on patents created in India, a tax break of 30 per cent for hiring people in manufacturing and 25 per cent corporate tax (if exemptions are foregone) for new manufacturing units are all aimed at boosting the manufacturing sector. “These initiatives need to be complemented with additional steps encouraging companies to hire more people. We want to skill India and encourage people to hire skilled workers,” Mr Rekhy pointed out said.
The Government previously announced a “high level committee to look into new retrospective tax cases” and in this budget Mr Jaitley announced there would be a new one-time system to resolve retrospective tax cases – namely the direct tax dispute resolution scheme.
The statutory mechanism will settle retrospective tax cases with a waiver on interest and penalties if the principal tax is paid and will mean companies can avoid court or arbitration. This could benefit some companies that have been tied up in disputes for decades such as Cairn Energy Plc, UK.
‘Retrospective tax amendments could have been bolder’
But Mr Rekhy said the “retrospective tax amendments” could have been bolder with more support for the cases of the current organisations involved. “This would have sent a good message to the global community that India truly means business in terms of a stable tax regime and consistent tax policy,” he said.
He also pointed out there were no coastal economic zones announced, an untapped area of potential in India. China has made much more use of its coastal areas.
Public Sector Banks in India remain under severe stress owing to non performing assets (NPAs). The 2016-17 Union Budget allocated Rs 25,000 crore (approx. USD 3.8 billion) for recapitalisation and banks have also been allowed to include revaluation reserves in their core capital calculations. But was it enough? “My view is that before this money is put in, the system and processes need to be changed, otherwise this money will be lost.,” Mr Rekhy said. “The governance of public sector banks needs to be improved. The autonomous Bank Board Bureau, which is likely to be operational in 2016-17, is expected to achieve this, “ he said.
For more information about the Union Budget 2016 click here.
Mr Rekhy discussed the Union Budget with Asia House corporate members at a private briefing held at Asia House during his trip to London. Partner at Clayton, Dubilier & Rice Vindi Banga and Arup Group Deputy Chairman David Whittleton also shared their views. To read more about that click here.
The newly-appointed High Commissioner of India to the UK H.E. Mr Navtej Sarna will join Asia House corporate members for a private briefing on the current economic and political developments in India on 4 May. This event is only open to corporate members. For more details click here.
Finance Secretary Cesar V Purisima who has been recognised as Finance Minister of the Year six times in five consecutive years by business and finance publications, will speak at a high-level conference on 7 April to discuss the Philippine economy, one of the most dynamic economies in the Southeast Asia region and the opportunities it presents. For more information about attending click here.