IndusView, Friday 27 February 2015 (London): The new Indian government will unveil more reforms in its 2015-2016 Union Budget on Saturday, to woo foreign investment and make India a manufacturing destination, in order to boost Gross Domestic Product (GDP) growth to 8% or higher. Mumbai’s stock exchanges, that have seen its benchmark Sensex index rise about 20% since Prime Minister Narendra Modi came to power last May, will exceptionally be open on Saturday.
The Modi government’s “Make in India” initiative is being closely followed by Indian companies and foreign investors. A lot of hope rests on the new government’s first full-year budget following its victory in last year’s general election.
The announcements to be made by Finance Minister Arun Jaitley will impact the investment cycle that the world’s tenth largest economy needs to lift GDP growth to an expected revised target of 8% or more from current projections of 7.4% in the current fiscal year 2015-16. India grew 6.9% in its previous fiscal year.
“Foreign investment and better collection of taxes is needed to fund the $1 trillion requirement outlined by Prime Minister Modi to build the country’s infrastructure over the next five years,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Better infrastructure is pivotal to increase India’s GDP as it will shear waste and inefficiencies in agricultural and industrial output. Widening its direct tax base beyond the current 3.3% of India’s population that pay tax and increasing the 15.5% contribution of tax to GDP is critical.”
India recently announcement investment plans of about $137 billion to upgrade its rail network. The state-owned Indian Railways operates one of the world's largest railway networks comprising 115,000 km of track that carry more than 13 million passengers a day and 1 billion tons of freight annually generating more than $26 billion in annual revenue.
Most corporate leaders and economists believe that there could be no better time to push through the reform agenda than now, given that the macroeconomic scenario has largely turned favorable, with inflation showing signs of coming under control, oil prices declining and growth in some of the more significant global economies showing signs of serious slowdown.
India's Wholesale Price Index (WPI) fell for the second time in three months in January as oil prices slumped, bolstering prospects for further interest rate cuts by the Reserve Bank of India (RBI) that unexpectedly cut rates for the first time in two years in January. WPI unexpectedly fell 0.39% last month from the same period a year earlier, its biggest decline since June 2009.
India's Current Account Deficit (CAD) is estimated to come down to 1.3% of GDP in the fiscal ending March, helped by moderation in petroleum and gold imports that were significantly lower than earlier projections.
“The new government is committed to development with transparency and good governance,” said Rangar. “A number of reforms have been implemented, paricularly via ordinances and more changes are expected to be announced in the upcoming budget announcement.”
To attract foreign investments, the government should best amend its controversial tax law and not impose tax with retrospective effect on overseas deals involving local assets.
“The Indian tax man’s potential treatment of low cost intellectual capital work allocated by India to multinationals, as being a higher value service and therefore, taxable at higher rates, will give reason to multinationals to seek other jurisdictions where taxation is simpler and the cost advantages are as good, if not better than India,” said Rangar. “The tax man should focus its efforts to widen the tax base and harmonsing its Goods and Services Tax and thereby, increase revenue.”
India, currently the world’s tenth-largest economy, is vying to be among the top five by 2022, according to the London-based Centre for Economics and Business Research (CEBR).