Jaitley Offers Encouraging Budget

Jaitley Offers Encouraging Budget

March 24, 2015 | Author: Gunjan Bagla, Managing Director, Amritt inc

India’s growing economy has meant every February its Finance Minister gets to divide a larger pie. With tax collections outpacing economic growth, BJP’s Arun Jaitley, like his Congress party predecessors, had plenty to offer India’s diverse political segments  in his first full year budget speech last month.

Business Friendly

Free market supporters have much to cheer as the amount of funds sent to the states by the union (federal or central) government reaches an all-time high of 35 percent. Most jobs are created by state level actions so this is a good thing. India’s consumers hold more gold than the citizens of any other country and a new plan to enable the monetization of the precious metal should free up capital for productive purposes. People who wish to hold gold for investment purposes will soon have two new alternatives: an Indian gold coin, perhaps to be named the Ashoka and sovereign gold bonds created by the government. India has a higher corporate tax than many emerging economies and the 90 minute budget speech included a commitment to lower it from 30 percent to 25 percent over a five year period starting in 2016. Jaitley also abolished the wealth tax, a regressive and unproductive cess on the assets of the rich which yielded just $250 million annually and replaced it with a surcharge on high incomes.

While India is one country, it currently functions like 29 separate markets with 29 tax regimes in each of its states. This has limited the efficient flow of goods while forcing many companies to have far more warehouses (“godowns”) than otherwise needed. The idea to introduce a uniform goods and services tax has been around for a decade but the previous government lacked the will and the votes to pass the constitutional amendments necessary to bring about this change. Arun Jaitley committed to firm near term date of April 1, 2016 for the introduction of this much awaited reform that could add 2 or 3 points of growth to India’s GDP by year two.

 

Big Data

Much of India’s wealth is in the cash economy and a large chunk of it stays hidden from the tax man. Taxpayer IDs (PAN numbers) will now be required to be provided in transactions exceeding $1600 and over time this will bring out hundreds of billions of rupees from the shadows. This should be cheered by foreign investors since they largely run honest businesses in India and have often been disadvantaged by unfair local competition.

In continuing the technology-based achievements of the previous government, it was confirmed that almost 800 million national ID (Aadhar) cards had been issued and virtually the entire population would soon have one. More significant than this is that 84 million rural Indians now have a digital bank account for the first time and the government plans to leverage the Aadhar cards and mobile phones for direct deposit of transfer payments for citizens in the welfare net. Already a pilot program to subsidize cooking gas cylinders has been implemented using this technology. Over time this approach can prevent the “leakage” of hundreds of billions of dollars into dark corners of the economy.

India has over 700 million people who survive on just $2 a day. The current budget includes the beginnings of a safety net. For just 20 cents per year, Indians will be able to insure against accidental death. Adults from age 18-50 will be able to buy full life insurance against natural or accidental death for $6 per year.

 

Takeaway

To me, the most interesting words by Finance Minister Jaitley were actually uttered within 3 days of his budget speech in parliament. At an informal speech on the campus of Columbia University in New York he declared, “If we are able to reach 8% (GDP growth) this year, grow it further and aim for 9-10% growth rate and then continue at that pace for many more years than 10 years, that is what India requires.” Since then Jaitley has visited the United Kingdom to market foreign direct investment into India at the UK-India Business Council as well as at an address to the Indian expatriate community.

While some of the items in the budget will be effective on April 1, the beginning of India’s fiscal year, majority of the changes require enabling legislation and regulations and will be rolled out over the next several months. India watchers have much to be optimistic about as this business friendly government goes about implementing its plans.

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