Modi Budget Seeks Growth Revival – GDP growth pegged at 8% next fiscal

By Sarkaritel July 10, 2014 20:15

Modi Budget Seeks Growth Revival – GDP growth pegged at 8% next fiscal

Fiscal Deficit at UPA’s target of 4.1% of GDP for 2014-15, but re calibrated at  3.6% in 2015-16 and 3% in 2016-17

Sop to Individuals and Corporate Sector – Hike in IT Exemption Limit by Rs 50k for all and Rs 100k for Sr Citizens, No change in surcharge, GST by year end, DTC to be reviewed, No retro tax but existing cases in court to go to logical conclusion 

Tax regime and regulatory framework to be more business friendly to attract investments

Revenue loss of Rs 22,000 crore expected to be made up by tax collection buoyancy

By TN Ashok / Economic Affairs Editor

New Delhi, July 10: Prime Minister Narendra Modi’s government today unveiled its 1st budget full of further economic reforms by raising FDI in insurance and defense to 49% from 24% and promising foreign investors and Indian industry a more business friendly regulatory framework that would be non-obtrusive and encourage them to put money into India’s new fast track growth story.

Reflecting the mind-set of Modi to revive growth and push up GDP growth to 8% achieved in pre global recessionary period and also put a strong hold on government finances, Finance Minister Arun Jaitley restricted himself in his 2014-15 budget to raising personal income tax exemption limits by only Rs 50,000 to Rs 2.50 lakhs but pushed it further for senior citizens to Rs 3 lakhs, suffering a Rs 22,000 crore revenue loss on this account and some other tax breaks. He told parliament of his hopes that  reforms would kick start growth generating revenues increasing tax buoyancy to make up the loss.

“We are confident that the expected growth in the economy would increase tax compliance and buoyancy in collections to recoup the projected losses”, Arvind Mayaram, Finance Secretary, told a post budget press briefing. Though there was lack of clarity on government steps to reduce fiscal deficit there was much optimism in the government based on presumptions of growth through further reforms.

Jaitley said government’s intention would be to keep a tight control on public finances so as to reduce fiscal deficit to 4.1% of GDP in 2014-15 as projected by the predecessor UPA government, but rein it at 3.6% of GDP in 2015-16 and 3% in 2016-17. “This is very much possible and we will achieve it “, Mayaram told newsmen later as he said he expected manufacturing/growth  to pickup. .

Jaitley announced the setting up of an Expenditure Management Commission in keeping with the Modi mantra of “Minimum Government and Maximum Governance” to usher in a new regime of expenditure reforms that also seeks to overhaul the subsidy regime (subsidies on food, fertilizer and fuel) and make it more targeted while protecting the marginalized. A Urea policy is also in the offing.

Revenue Secretary R Sashikant Das and Expenditure Secretary Ratan P Vatal clarified at a post budget briefing that the entire expenditure regime of the government would be reviewed by the commission while there will be no cut in subsidies as of now particularly on the fuel front where some relief has been achieved as rupee had strengthened and foreign exchange outgo had come down reducing the subsidy element.

The Finance Minister elaborated on the Modi theme of quicker growth through lesser government controls by saying the government was committed to providing a stable and predictable taxation regime that would be investor friendly and spur growth.  While asserting government’s right to retrospective legislation on taxes, he cautioned that the power hade to be exercised with extreme cautions and judiciousness viewing impact of each such measure on the economy and overall investment climate.

“The government will not ordinarily bring about any change retrospectively which creates a fresh liability”, he said adding however that cases at different stages of pendency in courts would see their logical conclusion. He said he was confident that this assurance would bring back many foreign investors.

Finance Secretary Mayaram faced with questions from newsmen in the post budget briefing on the Vodafone issue in courts said that the case would be allowed to go to its logical conclusion as stated by the finance minister. It’s very clear.

Vodafone and Indian tax authorities were locked in a $2.2 billion tax standoff since the British company acquired Hutchison Whampoa’s Indian mobile assets in 2007.  Just when it thought it had finally secured victory in the case in 2012 when supreme court dismissed the tax demand, the world’s second-largest mobile operator,  was hit suddenly when the government announced retrospective legislation that would change the rules and keep the tax demand live.

As Finance Minister disclosed in the budget that income from portfolio investments would be treated as capital gains, Finance Secretary Mayaram clarified that there was some confusion and lack of clarity on the issue because of which many FIIs left the country. Since the taxation on this aspect is clear as it comes under capital gains and not direct taxes, many FIIs which left India would come back, he said.

Jaitley hiked the FDI limit in insurance and defense to 49% from 24% hoping business and production in the latter would leap providing employment opportunities and income generation to help the economy further.

Faced with questions of allowing FDI into a sensitive sector as defense as under mining security of the country, Finance Secretary Mayaram clarified that defense or security of the country was not compromised. Production, supervision and monitoring was entirely under Indian management control which was more secure than buying military equipment 100% from from a foreign manufacturing facility in a foreign country.

Expectations were high on this budget from foreign investors and domestic industry that the NDA with a strong mandate to rule after a decisive victory at the hustings would take radical steps, comparable to the 1991 market reforms that ushered in high economic growth. These were not belied as more reforms were announced but FDI in multi brand retailing was kept in abeyance in consistence with the BJP’s avowed policy.

All measures outlined in the budget seek to halt a two-year spell of weak growth, often blamed on the previous UPA regime that sunk into a policy paralysis with bureaucrats taking no decisions because of a tough regulatory framework governing them. The NDA government instead announced incremental steps to boost capital spending in Asia’s third largest economy and reassure foreign investors that they would get fair treatment.

“We shall leave no stone unturned in creating a vibrant and strong India,” Finance Minister Arun Jaitley told parliament, vowing to raise the pace of economic growth to 7-8 percent in three to four years from less than 5 percent now. Ratings agency Moody’s said a lack of detail on how India would cut the fiscal gap made it “challenging to assess the credit impact” of Jaitley’s budget, yet keep its investment grade rating for India.

Jaitley also outlined measures to fill up government coffers to reduce fiscal deficit by seeking to raise a record US$ 13 billion from selling state assets – nearly four times what the previous government raised in fiscal March 2014. The FM said government would widen tax reforms by taking another look at DTC (Direct Taxes Code) and also put in place the GST (Goods and Services Tax) by unifying the 29 states into a common market, a measure that would boost revenue while making it easier to do business.

Foreign and domestic investors put huge monies into Indian stocks on hopes that Modi’s leadership and huge mandate would end a deadlock on a host of reforms during the 10-year tenure of his predecessor Manmohan Singh, whose coalition government was divided.

While stock markets expected more from the budget, and Jaitley was guarded in his granting too many  concessions to avoid populism ,  Indian scrips and bonds finished stronger on a day of volatile trading following assurances on commitment to fiscal probity.

Jaitley managed to upgrade India’s food distribution infrastructure. He raised subsidies on fertilizers and, against hopes of a reduction, actually extended diesel subsidies – measures aimed to aid farmers faced with prospects of bleak monsoon this year.

Industry which had backed the Modi campaign in May this year for the 16th Lok Sabha election welcomed the Modi-Jaitley budget as being very positive, visionary and investor friendly that would definitely spur growth and make possible a return to the 8% GDP growth rate. Both the CII Chief Ajay Shriram and FICCI President Siddarth Birla felt the budget was directional to growth inspiring investor confidence to put more money on India’s new growth story.

By Sarkaritel July 10, 2014 20:15

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