As the new government gets to work, one key item
on the agenda would be the revival of growth. The key to achieve such an
objective is to revive the investment climate. The major challenge for the
government would be to revitalize the investors’ faith while at the same time
keeping the inflation in check. The Reserve Bank of India’s Financial Stability
Report (FSR) highlights that the Global financial markets are showing signs of
improved stability although growth is still not on strong ground and easy
monetary policy continues in many jurisdictions. On the domestic front, the
return of a stable government has definitely provided impetus to the money and
the capital market. The BJP led government has already signaled its happiness
with the RBI, taking a stern line against the rising food prices by keeping the
interest rates pegged at the existing high levels.
Onions
can make the government cry. This has been witnessed in the recent Indian
history. Such are the conundrums of facing the country that presenting the
general budget is equivalent to a juggler, walking on a tight rope while
multitasking. Steps taken to rein in onion and potato prices by raising the
minimum export threshold price, is a clear indication of where the Modi
government’s priorities lie at this moment. Given the battle against WPI that
is being driven up mostly by food prices, it would be a great challenge to
inject a growth impetus in the budget.
The
Iraq situation is not going to help India. The rising oil prices will also have
a big impact on the CAD (Current Account Deficit). If the oil prices go out of
control, what will happen to India’s import bills? (India meets 80% of its oil
requirements by importing from foreign countries) So in order to curb in the
CAD, a major decision would be to increase the import duty on gold, which was
used by the previous government. But if the BJP wants to reduce the import duty
on gold to please the electorate that voted it in, where then would it find
resources or the ‘bitter pills’ to keep the CAD at bay?
Election of pro market Narendra Modi has raised hopes that reforms will
be put on fast track mode and projects which earlier got stuck, will be
cleared. This has led foreign investors to invest over one lakh crores till
date in equity and debt taking stock markets, to a new high. Also, what has
been helpful in part is the Ukraine crisis in Russia and concerns about growth
in China. Money which would have been poured in these two countries, is coming
to India. With such high hopes from the government by the investors-both
domestic and foreign, any slip off in budget will be severely punished.
Along with the growth and inflation, many issues need to be addressed
lucidly too. The ignominious invoking of the retrospective taxation system in
the Vodafone case, has attracted the ire of the foreign investors. It needs to
be resolved. GAAR needs to be addressed and its implementation should be
postponed. Hard decisions regarding the subsidy on food, fuel, fertilizers, LPG
should be pondered upon. GST should be implemented. But it would be interesting
to see how it materializes since Modi, as chief Minister of Gujarat, had
opposed it vehemently. There is also a need to increase the non tax revenue of
the government. PSUs sitting on a huge pile of cash which they are not using,
should be asked to give more dividends to the government. The DTC (Direct Taxes
Code) Bill, which has been dwindling in the Parliament for too long now, needs
to be legislated. Also over the last three years, India has been hit badly by
‘transfer pricing’ issues too. Finally, we continue to pursue the exchange of
information with Switzerland, we need to enter into a treaty of the type
entered into by UK where account holder who doesn't agree to be named, would be
taxed on the accumulated balance and on ongoing income.
Also India’s greatest bugbear of the immediate future is going to be the
unemployment issue, in a country with an increasingly younger demographic
profile. If there is no growth in the manufacturing sector, which is actually
the prime mover of employment generation, the rising demands of the
aspirational India won’t be met and the Indian market will be flooded with
cheap Chinese products.
According to the Prime Minister, the nation has to be governed with
certain ‘bitter pills’. But if Mr. Jaitley assumes that he can do that by
tinkering with the tax laws or reducing subsidies, he would fail badly. The
test for the Finance Minister would be to improve India’s rankings in the Human
Development Index, Ease of Doing Index, and Corruption Index. For this, he has
to be refreshingly different from his predecessor.
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