UK-India Business Council perspective of Budget 2018: Nothing to fear, nothing to cheer

By Kevin McCole |

Clearly, the 2018 Indian Budget statement, delivered by Arun Jaitley on 1 February, contained some ambitious and eye-catching announcements aimed at improving the "ease of living for the poorest of the poor”.

These announcements included a minimum support price of 150 percent for agricultural produce, investments in education, rural roads and, most ambitiously, a healthcare insurance scheme that will give 500 million people insurance cover of £5,500.

No one seems to be questioning the importance of these schemes, but the government’s ability to pay for and deliver, in particular, the healthcare scheme has been questioned.

Given the ambition, complexity and importance of the healthcare scheme, it has been argued that the government has to take the time to get it right. A rush to meet an arbitrary politically-driven deadline will damage the programme’s effectiveness and sustainability.

Have we seen the end of the ease of doing business campaign?

Jaitley’s statement that the government’s focus is shifting from the “ease of doing business to the ease of living for the poorest of the poor” could be seen as cause for concern by businesses.

I think these concerns are misplaced.

Given that this was the last Budget before the next general election (due by May 2019) and series of 10 State elections in 2018, it is no surprise that the political rhetoric and high-profile announcements were aimed at the 500 to 600 million people living in rural India.

During the 2014 election campaign, Prime Minister Narendra Modi promised that “Good times are coming”. For many, this has not yet become a reality. So, although this was always a two-term project, it is no surprise that money and attention is being directed towards the rural population.

The ease of living for the poorest of the poor will, rightly, receive more attention. But the ease of doing business efforts will continue apace because Modi and Jaitley are pragmatic.

They know that it is the private sector that will create the jobs, prosperity, and tax receipts to fund schemes aimed at improving livelihoods. And there is ample evidence that Central and State ministers and departments are upping their game when it comes to engaging businesses and improving the ease of doing business.

Fine, but what did Jaitley have for businesses?

I am hesitant to reach a conclusion today, as devilish details may still emerge. After all, the hugely damaging retrospective tax law from the 2012 Budget didn’t emerge until two weeks after the Finance Minister’s Statement to Parliament.

Nevertheless, with the above disclaimer in place, I feel comfortable enough to say that the Budget was, on balance, OK for business.

Companies involved in healthcare, education, and road building will benefit from these rural schemes. So will consumer goods companies selling into these millions. India as a whole will benefit from a healthier and better-educated population as this will raise prosperity and productivity, stimulating demand across India.

So, these indirect benefits and opportunities, when they materialise, should be welcomed by the business community.

Two Good, and Too Bad

Two elements of the Budget struck me as positive developments.

First, the increased investment in infrastructure, particularly in airports and urban infrastructure, was good news. As the UK has world-leading capability in both areas there is scope for even more India-UK collaborations.

Secondly, reform of the labour law, which will see an expansion in the use of contract workers from just the textiles and footwear sectors to all industries, should be welcomed.

As UK businesses employ nearly 800,000 people in India – 1 in 20 of all jobs in the organised sector – labour laws matter, and if they are sufficiently flexible they will encourage more companies to employ more people.

There were, though, a number of areas where the Budget was not so good for business.

Be thankful I don’t take it all, ‘cause I’m the Taxman

Tax payments and compliance has not become simpler, and the threat of retrospective tax still hangs over business. Simplifying the tax system, and making it fairer, is a major ask from businesses. It is something that would sharply improve the ease of doing business. So, in this regard, the Budget was a missed opportunity.

Companies with a turnover of less than around £28 million (Rs 2,5000,000,000) will thank Jaitley for the cut in corporate tax from 29 percent to 25 percent. However, there was no tax cut for the big businesses that contribute so much to India’s employment, exports, and growth, despite FM saying in 2015 that he would reduce it to 25 percent this fiscal.

Does the tax policy help or hinder Make in India?

With Indian and international companies weighing-up competing investment destinations, lower tax countries, particularly in South East Asia, could attract the manufacturing investment India is trying so hard to attract.

The Budget contained another set of announcements that could inhibit the ‘Make in India’ campaign.

While the objectives of announcing new import duties on a range of goods were to protect those manufacturing in India and provide an economic incentive for others to manufacture in India rather than import, there are unintended and negative consequences.

A perception is developing that India is “protectionist”, despite Modi’s compelling pro-globalisation and anti-protectionism Davos speech in January. Perceptions matter, and a perception – no matter how mis-placed – that India is protectionist will deter companies from doing business in and with India.

The cost of tariffs matter too. They will stop companies from selling to India and, for two reasons, this will reduce the number of companies investing in India.

First, businesses will often invest in a country only once they know there is a market for their goods and services. And they will only know there is a market once they have achieved exporting success.

The other reason investments could reduce due to higher tariffs is the global nature of manufacturing supply chains. Companies looking to ‘Make in India’ will plan to import much of their components in the short and medium term as it will take longer to develop a domestic Indian supply chain.

So, higher tariffs on components can weaken the economic case for investing in India. Combine this with a higher effective corporate tax rate than competing countries, and India is giving investors much to consider.

Conclusion: Economic Reform is a long-term process, not an event. Nevertheless, this Budget was an important event. For business, it signaled the government’s desire to boost SMEs and manufacturing, even though the tax and tariff policies have unintended consequences. For everyone, the Budget signaled that the government is sharply focused on the electorate. The next general election is due by May 2019, but with this Budget and a clutch of big State elections in the autumn, the prospect of a general election in October/November has risen sharply.

This article was orignally posted by FirstPost on the 20 Feb 2018.

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