India budget fails to excite investors, but promises reform
Jul 10, 2014 2:54pm by Avantika Chilkoti
Arun Jaitley, India’s finance minister, unveiled a maiden budget on Thursday which failed to excite stock market investors but made several pledges for reform which – if they are implemented – may coax future efficiencies out of an economy burdened by red-tape, corruption and opacity.
The budget outlined plans to raise foreign investment limits in defence and insurance, overhaul India’s US$43bn subsidy regime, and simplify its archaic tax system to make it more transparent and bolster revenue growth. That, the government expects, will help raise growth from last year’s level of about 4.6 per cent.
However, investors did not get the “big bang” reforms that many were expecting, sending the benchmark Nifty equities index down 0.2 per cent in the day to 7,567.75. Nevertheless, there was much in Jaitley’s budget to suggest optimism.
First, investors had been hoping for the retrospective amendment of laws on indirect transfers, which have left multinational groups such as Vodafone fighting retrospective taxes with Indian authorities.
On this topic, Jaitley simply said that, if a new case comes up related to the amendment it will be referred to a high level committee. In reaction, Ketan Dalal, senior tax partner, PwC India said in an emailed statement:
There was a widespread expectation regarding neutralisation of the retrospective amendment re indirect transfer. However, that has not happened, but at least there has been a clear acknowledgment now that retrospective taxation in future will not be resorted to.
The decision has left analysts unclear about what will happen to existing cases and almost as soon as Jaitley wrapped up in New Delhi, Vodafone said it would push for international arbitration in its seven-year battle with the Indian tax authorities over capital gains involved in the telecom group’s 2007 acquisition of Hutchinson Whampoa.
On the question of the Goods and Services Tax (GST), the introduction of which many had hoped would be announced, Jaitley offered a half-way house. He said the government is ready to approve a legislative scheme to enable the introduction of a GST to “streamline the tax administration, avoid harassment of the business and result in higher revenue collection”.
This suggests the government intends to push through this tax reform but that no roadmap has been laid out as yet.
In some areas, Jaitley did meet expectations. He opened up foreign direct investment in ecommerce, and upped the cap on foreign direct investment (FDI) in defence to 49 per cent, from 26 per cent previously.
But then there was a whiff of questionable policy too: the decision to devote Rs2bn ($33.34m) to a statue of Sardar Vallabh Bhai Patel in the home state of Narendra Modi, the prime minister, prompted some jibes on social media.
Modi’s administration will retain the previous Congress government’s ambitious 4.1 per cent fiscal deficit target for this year, despite pressure on state coffers from sluggish tax revenue, rising oil prices linked to turmoil in Iraq and concerns about a poor monsoon.
Jaitley also set a fiscal deficit target of 3.6 per cent of GDP for the next financial year, which starts in April, and 3 per cent the subsequent year. For a pre-budget discussion of budget deficit expectations, see here.
With equity markets rallying in the past six months on hopes of a strong new government at the centre, the government may expect to make money by selling off stakes in public sector companies, and to earn revenues as these groups post good profits and dividends. However, if tax receipts disappoint, New Delhi could struggle to meet its budget deficit target.
“While tax revenue growth seems a tad high that is on an assumption that the manufacturing sector growth will pick up in the second half,” says Shubhada Rao, chief economist at Yes Bank. “At this juncture it looks slightly optimistic.”
And, all in all?
“The reactions maybe on the Sensex were because people really get thrilled if you see some big bang changes,” says Vipul Jhaveri, partner at Deloitte Haskins & Sells. “What is refreshing here is that rather than any big bang changes what he has done is made very small changes across geographies, across various sectors.”
Jul 10, 2014 2:54pm by Avantika Chilkoti
Arun Jaitley, India’s finance minister, unveiled a maiden budget on Thursday which failed to excite stock market investors but made several pledges for reform which – if they are implemented – may coax future efficiencies out of an economy burdened by red-tape, corruption and opacity.
The budget outlined plans to raise foreign investment limits in defence and insurance, overhaul India’s US$43bn subsidy regime, and simplify its archaic tax system to make it more transparent and bolster revenue growth. That, the government expects, will help raise growth from last year’s level of about 4.6 per cent.
However, investors did not get the “big bang” reforms that many were expecting, sending the benchmark Nifty equities index down 0.2 per cent in the day to 7,567.75. Nevertheless, there was much in Jaitley’s budget to suggest optimism.
First, investors had been hoping for the retrospective amendment of laws on indirect transfers, which have left multinational groups such as Vodafone fighting retrospective taxes with Indian authorities.
On this topic, Jaitley simply said that, if a new case comes up related to the amendment it will be referred to a high level committee. In reaction, Ketan Dalal, senior tax partner, PwC India said in an emailed statement:
There was a widespread expectation regarding neutralisation of the retrospective amendment re indirect transfer. However, that has not happened, but at least there has been a clear acknowledgment now that retrospective taxation in future will not be resorted to.
The decision has left analysts unclear about what will happen to existing cases and almost as soon as Jaitley wrapped up in New Delhi, Vodafone said it would push for international arbitration in its seven-year battle with the Indian tax authorities over capital gains involved in the telecom group’s 2007 acquisition of Hutchinson Whampoa.
On the question of the Goods and Services Tax (GST), the introduction of which many had hoped would be announced, Jaitley offered a half-way house. He said the government is ready to approve a legislative scheme to enable the introduction of a GST to “streamline the tax administration, avoid harassment of the business and result in higher revenue collection”.
This suggests the government intends to push through this tax reform but that no roadmap has been laid out as yet.
In some areas, Jaitley did meet expectations. He opened up foreign direct investment in ecommerce, and upped the cap on foreign direct investment (FDI) in defence to 49 per cent, from 26 per cent previously.
But then there was a whiff of questionable policy too: the decision to devote Rs2bn ($33.34m) to a statue of Sardar Vallabh Bhai Patel in the home state of Narendra Modi, the prime minister, prompted some jibes on social media.
Modi’s administration will retain the previous Congress government’s ambitious 4.1 per cent fiscal deficit target for this year, despite pressure on state coffers from sluggish tax revenue, rising oil prices linked to turmoil in Iraq and concerns about a poor monsoon.
Jaitley also set a fiscal deficit target of 3.6 per cent of GDP for the next financial year, which starts in April, and 3 per cent the subsequent year. For a pre-budget discussion of budget deficit expectations, see here.
With equity markets rallying in the past six months on hopes of a strong new government at the centre, the government may expect to make money by selling off stakes in public sector companies, and to earn revenues as these groups post good profits and dividends. However, if tax receipts disappoint, New Delhi could struggle to meet its budget deficit target.
“While tax revenue growth seems a tad high that is on an assumption that the manufacturing sector growth will pick up in the second half,” says Shubhada Rao, chief economist at Yes Bank. “At this juncture it looks slightly optimistic.”
And, all in all?
“The reactions maybe on the Sensex were because people really get thrilled if you see some big bang changes,” says Vipul Jhaveri, partner at Deloitte Haskins & Sells. “What is refreshing here is that rather than any big bang changes what he has done is made very small changes across geographies, across various sectors.”
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