Modi 2.0 has a target for the Indian economy to reach $5 trillion by 2025. That is a huge jump from current GDP of $2.7 trillion. A day before, the Economic Survey laid out the road map of a sustained 8 per cent GDP growth in the next 5 years with a moderate 4 per cent inflation. The survey also fleshed out the strategy of following a 'virtuous cycle' of savings, investment and exports. The survey had also stressed the point that private investment is the key driver of demand, capacity creation, increase in labour productivity, introduction of new technology and generating jobs. It was a template put together by the new chief economic advisor, Krishnamurthy Subramanian.
The new finance minister Nirmala Sitharaman has taken a leaf out of the first Economic Survey of the BJP led NDA government. She has taken the first step of reviving or pushing investments in the economy that slowed down to 6.8 per cent GDP in 2018/19. There are FDI relaxations in Budget 2019/20 in capital intensive sectors like aviation and insurance. FDI is currently capped at 49 per cent in the aviation sector. Similarly, the finance minister has also proposed higher FDI limits in media (animation). While aviation would see foreign capital inflow, the insurance sector is well stocked in terms of capital as it has passed through the initial stage of setting up infrastructure. Today, most companies are profitable and tapping the capital market for capital. The big boost to capital would come from 100 per cent FDI in insurance intermediaries, which are mainly insurance aggregators, TPAs (third party administrators) and insurance brokers.
Budget 2019/20 also gave a boost to FDI in single brand retail. Currently, a mandatory 30 per cent local sourcing norm applies to players like iPhone maker Apple or furniture maker IKEA. The finance minister hinted at some relaxation, though it would mean moving away from the Make in India theme and allowing global majors to source more from China and other low-cost destinations.
Budget 2019/20 also talks about setting up mega manufacturing plants for sunrise and advanced technology areas like semi-conductors, solar cells, lithium storage batteries, computer servers and laptops. The finance minister talked about creating a global hub for electric batteries. This measure is also directed at promoting exports or Make in India in the next 5-10 years.
The FM has also taken the advice of the chief economic advisor on infant companies or start-ups that have huge potential for creating jobs and also contribute to economy. The vexing angel tax issue was bothering the industry. The finance minister clearly said that funds raised by a start-up will not require any scrutiny from the tax department. They will also not be subjected to any scrutiny in share valuation, etc. The Budget also talks about streamlining multiple labour laws into four codes to reduce the number of disputes.
The biggest hindrance to pushing investments in India is the high cost of capital. India has capital requirement of over Rs 20 lakh crore every year as against its annual budget size of less than Rs 30 crore. The budget talks about an action plan to raise long-term bonds or credit default swaps especially focussing on the infrastructure sector. The government has also allowed FIIs and FPIs to invest in debt securities issued by NBFCs. This would provide much needed capital to NBFCs, which have been asking for a special liquidity window from the RBI. The Budget also proposes an electronic fund raising platform under Sebi for listing social and voluntary organisations. The retail investor would be encouraged to invest in treasury bills and government securities.
Investments from the government will continue to flow into infrastructure. The government has a plan to invest Rs100 lakh crore in the next 5 years. The finance minister talked about new structures and flow of funds through a development finance institution model. In addition, the government would be divesting stake in PSUs. The target for disinvestment has been kept at Rs1,05,000 crore for 2019/20.
Boosting Financial markets
The Budget had a host of proposals for boosting International Financial Services Centre. There are several tax concessions to encourage more activity in the financial centre. The government has also decided to pump in Rs70,000 crore capital into public sector banks. This will help banks that are in desperate need of capital to kick start lending. There is also a one-time guarantee by the government to banks for purchase of high-rated pooled assets up to Rs 1 lakh crore of financially sound NBFCs. This will allow NBFCs to sell assets to banks and generate resources. It has been proposed that the RBI, which has the responsibility of maintaining financial stability in the system, also be made the regulator of housing finance companies, which are as of now under the purview of National Housing Bank (NHB).
The government has also decided to raise a part of its gross borrowing in the international market. The finance minister said that India's sovereign external debt to GDP is low at 5 per cent, which offers the scope to raise money in the international market. The rising borrowing because of fiscal deficit is putting a lot of pressure in the domestic market, especially on interest rates. The raising of funds abroad would certainly ease the burden.