Budget series – Sector focus on Financial and Professional Services
There has been a lot of noise about the Union budget of India which took place on the 1st February but what does it mean for professional services sector of the UK?
It was good news for the Insurance Sector. The increase in FDI rates for Insurance has risen from 49% to 74% and the announcement that the “Indian-Owned and Controlled” legislation is being updated to allow foreign ownership of insurance companies in India. Although we note that the budget referenced that safeguards would be put in place on foreign insurance companies. We await to see the detail of what this means.
UKIBC has been pushing for the opening up of this sector for a number of years and we believe that doing so will not only allow for the creation of new jobs and tax takes but will also have a positive direct impact on FDI and innovation.
Current insurance penetration levels in India are around 3.4%, well under the Asia average of 5% and far behind the likes of Japan with 11%.
It was also good to hear the announcement of the further disinvestment by the government in this sector and confirmation of the IPO of LIC by 2022 reducing the public sector dominance which will allow further competition.
One added and often unrecognised benefit of opening up this sector is the new capital that will be created by new insurance policies and pension funds looking to invest those premiums in often safer asset classes such as government and corporate debt and infrastructure projects.
The budget offered a chance for India to address some of the structural issues that had arguably stopped India attracting more FDI. Areas such as Land, Labour and Liquidity for example. On the latter it was good to see the announcement of a permanent framework for the purchase of Investment grade debt both in stressed and non-stressed assets. The ability for India to create its own corporate debt market and business to use other vehicles for raising funds will hopefully bring down the costs of raising finance in India.
The announcement of the Development Infrastructure Institution was also welcomed and will help attract foreign investment via sovereign wealth and private finance into these infrastructure projects and more importantly help build a pipeline of investment ready projects that many foreign investors have cited as a key barrier to investing in India.
The creation of the Asset Reconstruction Company will help to recapitalise the banking system, this is very similar to what the UK did after the financial crisis with the creation of ring-fenced bad banks built to take non-performance assets and loans and disposing of them to Alternative Investment Funds and other investors.
On Land and Labour issues, we will have to wait until India has a little more fiscal head room to address these major challenges.
From a global business point of view it was good to see no increases in direct taxes but there are still huge disparities and of course the tax terrorism issues that Prime Minister Modi`s government inherited from the previous government via the retrospective tax issues. The whole international business community is awaiting India`s decision on the International Arbitration rulings that found in favour of Cairn Energy and Vodafone on retrospective tax. Acceptance by the Indian government of the arbitration will enhance India`s reputation as a leading investment destination with rule of law at its core.
One area we have been advocating for change on is the current disparity on tax rates especially linked to corporate tax rates to foreign companies compared to domestic companies (43.68% versus 25.17%), Globally, the general practice is to have a tax rate parity across all kinds of companies within the same industry. Tax parity and the acceptance of international arbitration would vastly improve India`s FDI attractiveness to the global business community.
Finally, the announcement of a 35% increase in infrastructure spend was welcomed and we will certainly be showcasing how UK professional companies can play their part in support this infrastructure. The announcement of projects such as the spending on Railways with the Western and Eastern Dedicated Freight Corridors announced and the Public Private Partnerships at ports and Airports will help build connectivity making it easier to build efficient supply chain networks and hopefully reducing logistic costs in India.
Overall a good business as usual budget for India!