Require firm action on retrospective tax issues
With the world economy slowing down, India remains a rare beacon of growth. But as Mr. Arun Jaitley recently told the City of London, growth of 7 per cent or so isn’t enough to generate the jobs and livelihoods that young Indians need and deserve.
Mr. Jaitley’s first Budget restored the dynamic of economic reform, pushing FDI up to 49 per cent in defence and insurance, introducing incentives for FIIs, backing real estate and infrastructure investment trusts, providing a fillip to debt markets and taking advantage of lower oil prices to cut distorting fuel subsidies. Last year’s budget reinforced the growth dynamic of ‘competitive federalism’, passing greater freedom and resources to the States while challenging them on ease of doing business.
His commitment to budget discipline and a measured reduction in the fiscal deficit, alongside the RBI’s clarity on monetary policy, has provided the macro-economic stability on which investment depends. And steps like the creation of the National Investment and Infrastructure Fund (NIIF) are vital in mobilising the international as well as domestic investment that are vital to accelerate India’s growth.
So what should we expect from Mr. Jaitley’s third Budget? Dismal economic conditions abroad demand more decisive action at home. With domestic investment held back by non-performing loans on bank balance sheets (particularly those of the state-owned banks), December’s Insolvency and Bankruptcy Bill is a vital leap forward.
By introducing it as a money bill in the Lok Sabha, the Government has significantly increased its chances of success. Particularly if the Budget reinforced the Bankruptcy Bill with steps to reform the state-owned banks through disinvestment and mergers, this could transform the Indian financial landscape — ensuring a consistent supply of credit; attracting new capital and expertise into business revival; and finally, enabling a real corporate bond market.
Mr. Jaitley’s promise of a stable and predictable tax environment was widely welcomed. We know from our experience in the European Union that the creation of a single market accelerates growth. So business will welcome further moves to win the argument on GST and to prepare for its effective implementation. Equally welcome would be firm action to deal with the retrospective tax issues that continue to trouble Indian as well as international investors.
I served for a decade in Tony Blair’s government which, like Prime Minister Modi’s, began with an overwhelming electoral victory. I know that economic and social reform is hard and that there are always political reasons for caution. But I also know that, when you leave office, the biggest regrets are not reforming fast enough when you had the chance. The entrepreneurial energy of young Indians is astonishing. If Mr. Modi and Mr. Jaitley can seize the opportunity to accelerate the reforms they have started so well, then India and Indians will have every reason to cheer.