IndusView, Saturday 28 February 2015 (London): Asia’s third-largest economy unveiled its annual budget today saying it is aimed at a high-growth trajectory. The budget is focusing on improving infrastructure, cutting the fiscal deficit and boosting investment so that growth would accelerate to 8%-8.5% in India’s next financial year starting in April.
“The budget gives an opportunity to the increasingly young, middle-class and aspirational India to realize its full potential,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “The time was ripe for long-awaited reforms to kickstart the economy.”
Presenting the budget in parliament Mr. Jaitley said the country was growing at a strong rate, inflation was down and foreign exchange reserves were high. Falling global oil prices have given the government the room to spend on creating infrastructure without increasing inflation or messing with fiscal deficit targets.
He further announced a panoply of economic and tax reforms and promised $11.36 billions of dollars of investment towards infrastructure. Five ultra-mega power projects of 4,000 MW capacity each are planned. The government will introduce tax-free infrastructure bonds for road, rail and irrigation projects. The focus will be on additional road and ports projects.
To the delight of business, Mr. Jaitley said a nationwide general sales tax (GST) system – “a state-of-the-art indirect tax system” – would be put in place by April 1 next year, replacing a jumble of local fees and taxes that prevent India from being a single market for goods and services.
“This is not a ‘big-bang’ budget, but a good budget more focused on smaller issues, and ironing out a lot of irritants to investors in the process,” said Rangar. “Neither the financial markets, nor most analysts, detected the dramatic reforms that Mr. Modi’s supporters have been urging.”
Manmohan Singh, who served as India’s prime minister for 10 years under the Congress Party, faulted the budget as too cautious, arguing that the new government had missed a chance to cut spending or increase tax revenues.
Corporate taxes, meanwhile, will drop from 30% to 25%, which could increase Indian firms’ compliance.
This is a positive budget for the Private Equity (PE) industry as it addresses some of the key pain points of the industry. The removal of distinction between FPI and FDI is welcome as it is not really possible to differentiate between the two and has caused delayed response from investors. Foreign Investment is now allowed in alternative investment funds, which will stimulate the environment of foreign investment and private equity interest in India.
There are 200 plus active fund managers operate in India while 100 are domestic fund managers. The PE industry claims over 12% employment growth in PE/Venture Capital (VC) backed companies against 3% employment growth in non PE-backed companies.
Modi didn’t take further steps today to wind up fertilizer, cooking gas and liquid petroleum gas subsidies. Jaitley repeated pledges to provide homes, toilets and electricity for India’s 1.2 billion people by 2022, which would be the 75th anniversary of the country’s founding.
India’s economy is projected to expand as much as 8.5% in the next fiscal year, according to the latest Finance Ministry estimates, the fastest pace among the world’s biggest emerging markets. The ministry cautioned, however, that the forecast is based on a revised method for calculating gross domestic product and India’s economy is still recovering.