There are great expectations that Finance Minister Nirmala Sitharaman will announce a slew of solid policies in her second Budget to be presented on 1 February that will go a long way in rescuing the economy from its current growth slowdown by reviving the animal spirits among private entrepreneurs. The consensus view echoed by most of the commentators is to go for expansionary fiscal policy. However, such a policy pitch is bound to land the economy in more troubles as it is tantamount to straying away from fiscal prudence with its attendant ballooning deficits and inflation prints.
The stock market is on a roll with benchmark indices testing new records every trading day fuelled by an increased inflow of funds from foreign investors. Going by the available data, foreign institutional investors (FII) have pumped in Rs 1 trillion (Rs 1 lakh crore) into the Indian stock market in 2019, a multi-year high.
Further, foreign direct investment (FDI) equity inflows till October 2019 stood at a staggering $23.35 billion, indicating that the government's efforts to improve ease of doing business and relaxation in foreign direct investment norms are paying off. From an investor’s point of view, this auger well for the economy provided the finance minister goes full steam ahead with attracting foreign funds—either as direct investment or investment in equities—by further relaxing FDI and FII limits.
There are still a number of sectors that continue to be restricted from FDI and FII inflows. Reforming regulation around these sectors to encourage foreign fund inflows could prove a winner to attract more overseas savings into the system, leaving enough domestic savings for spending and investment. Such a policy should be extended to the financial sector as well by removing the 49 percent cap on foreign investments.
Further, the limit on FIIs holdings in sectors and companies should also be relaxed as the regulators are insisting on paring down promoters holdings in firms, a point that the finance minister has reiterated time and again. This will bring more liquidity into the market. Together, such steps will benefit the nation from what is called the “evolved investment capabilities these global investors can bring to the table” without importing inflation.
The next proposal that may top FM’s Budget speech must be the disinvestment in strategic PSUs and outright privatization of loss-making PSUs. Though the Government has budgeted for a divestment receipt of Rs 1.05 trillion (Rs 1.05 lakh crore) for FY 20, it has so far failed to reach even the 10 percent mark in this regard. Therefore, the Finance Minister should announce a strict time-line for big-ticket divestment so that investors should be ready when the share sales hit the market.
Another way to bolster economic growth is to continue support for the startup ecosystem. It is only a truism that talented entrepreneurs can power non-linear growth even in a slowing economy by rooting for innovations in products, services and business models. A lower tax rate for partnerships and LLPs may also be considered to give them a level-playing field with their bigger rivals.
Besides, the finance minister should announce some sector-specific incentives to the ailing non-banking financial companies (NBFCs), real estate, infrastructure and independent power producers and distribution companies which are hit by lack of demand and liquidity. It should be ideal if the finance minister could outline a feasible plan for each of these sectors with a clear layout laid out.
Dividend Distribution Tax (DDT) and tax on Long-Term Capital Gains (LTCG) should be done away with since they remain as major drags on investors’ appetite in investing in the market. Finally, a dispute settlement mechanism for tax squabbles should be simplified and fast-tracked so that investors’ faith in the nation’s legal system should be enhanced further.
Such an approach will pay off for the government immensely since it means more tax revenue for the exchequer, boost in demand and hence investments and government spending without turning to fiscal adventurism. Bringing in transparency and simplicity in the tax regime will lead to a few, if not few, litigations that will elevate the trust of investors in the country’s legal system. If the Budget 2020-21 addresses these issues, the economy can hit the fast-track to clock the $5 trillion mark in as many years.
(The writer is Founder & MD, Singhi Advisors)
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Updated Date: Jan 27, 2020 12:14:40 IST