India's Budget 2020: Do Not Neglect Developments Signifying Solid Fundamentals
- In Economics
- 10:30 AM, Jan 27, 2020
- Mukul Asher
As the 2020 Union government’s budget presentation data of February 1, approaches, it is essential to recognize many recent developments which underscore acceleration of what Anand Mahindra, at Davos 2020, as reported by Bloomberg TV, has called the necessary process of detoxification of the economy. As this process is towards its end, he expected India’s growth to accelerate in 2020-21.
It has been distressing to observe the main stream media’s pre-budget coverage. It has exhibited very low level of economic literacy, especially on public financial management; combined in many cases with deliberation distortions and malice towards the current Union government. The revealed tendency of the opposition parties to give low priority to at least not harming India’s core interests have also been distressing to observe.
I write these comments with great anguish, but thy do need to be made so that India’s future progress is not hampered.
The recent developments may be grouped under the following categories.
Corporate Rate Tax Cut
The Indian government announced a major reform of corporate tax rates on September 20, 2019.
The base corporate tax rate has been cut from 30 per cent to 22 per cent. Companies that do not claim benefits for incentives or concessions will be eligible for the effective tax rate of 25.75 per cent, while new manufacturing firms established after October 1, 2019, are eligible for an even lower base corporate tax rate of 15 per cent (effective tax of just over 17 per cent) if they make fresh new investments in manufacturing by 2023 and are not claiming incentives.
Services firms are expected to be major winners while manufacturing companies in the consumer goods, capital goods and steel sectors will also reap significant benefits as many of them have an effective tax rate of around 30 per cent
The average corporate income tax rate across the OECD has dropped from 32.5 per cent in 2000 to 23.9 per cent in 2018
Lower corporate tax rates are likely to reduce tax revenue in 2019-20 and beyond, but make India very tax competitive globally in doing business.
India exported USD 3 billion worth of smartphones last year. The target for 2025 is very high at USD 110 billion, or 37 times growth in 6 years. India has set up special fund to provide incentives for setting up electronic plants for companies from China and Vietnam. This should be a national effort by all stakeholders.
Reduction in Current Account Deficit
Chart 1 summarized India’s official international trade numbers for goods and services for April-December 2019. The total trade was USD 852 Billion. At this rate, total trade for the full 2019-20290 s expected to be about USD 1100 Billion, more than a third of India’s GDP.
India’s overall trade deficit for April-December 2019-20 is estimated at USD57.66 billion as compared to USD89.46 billion in April-December 2018-19. This represents a significant improvement, facilitating India’s external sector management. Policymakers however would need to take initiatives to not led INR appreciate unduly.
Some have argued that reduction in imports of merchandise of 8.9 percent could portend slower growth for import dependent Indian economy. While capital imports have indeed declined significantly without examining the composition of reduction, it is not appropriate to reach such strong assessment. Whether the reduction is due to volume or due to price reductions need to be examined. There are imports, such as gold, palm oil which have different growth implications than imports of machinery.
India imports edible oils amounting to 15 million tonnes per annum, costing over Rs 75,000 crore. India plans to increase production of oilseeds from the current 30 million tonnes to over 47 million tonnes by 2024-25. There are indications that the 2020 Union Budget may incorporate this item.
Figure 1 India’s Total International Trade, April-December 2020
FDI (Foreign Direct Investment) and Foreign Portfolio Investment (FPI) Flows
India was among the top 10 recipients of FDI in 2019, attracting $49 billion in inflows, a 16 per cent increase from the previous year. The Global Investment Trend Monitor report compiled by United Nations Conference on Trade and Development (UNCTAD) states that the global foreign direct investment remained flat in 2019 at $1.39 trillion, a one per cent decline from a revised $1.41 trillion in 2018. This suggests that India has recorded substantial increase in FDI against essentially flat FDI globally.
India is to increase the foreign portfolio investment limit in a company from the current 24% to a higher threshold set for its sector. In addition to the expected inflows from active asset managers, the move could trigger net investments of between $2 billion and $2.5 billion to Indian equities from passive funds, according to estimates from Target Investing and Morgan Stanley.
The change will likely increase India’s weighting in the MSCI Emerging Markets Index by about 70 basis points, according to the two brokers, compared with 8.6% as of last month
According to Bloomberg, India has achieved the distinction of being the world’s largest derivatives exchange by volume.
PMI Indexes Rising
The dominant services index rose to the highest level in five months in December 2019 as improving new work orders helped boost activity. The seasonally adjusted Markit India Services PMI (Purchasing Manager’s Index) climbed to 53.3 from 52.7 in November, helping post a strong end to the calendar year.
India’s manufacturing PMI also rose — to 52.7 from 51.2 a month ago — boosted by the fastest increase in new orders since July. A reading above 50 means expansion while anything below that suggests contraction.
Industrial output rose for the first time in four months in November 2019. However, the index of eight core infrastructure industries, which feeds into the index of industrial production, however declined 1.5% in November from a year ago -- the fourth straight month of contraction. This is an area of concern for the economy.
In assessing India’s inflation numbers, it should be kept in mind that as per National Account Statistics (NAS), share of food in overall consumer expenditure is 30%, while share of food in overall CPI (Consumer Price Index) is at 46% as per CES Consumer Expenditure Survey of the National Sample Survey Office) survey. High time CES and NAS are made consistent for better data interpretations. Therefore, the figures must be interpreted in a nuanced way, bot when CPI shows rising trend and when it shows declining trend.
The adage that it is not enough to know the name of something, one must know the substance is most particularly. Applicable here.
Initiatives on Climate Change
Tackling impact of climate change has been receiving considerable attention globally. Climatescope has rankled India first in 2019 out of 104 countries (in 2018 India was ranked second) globally, with a score of 2.93, with strong score for fundamentals, opportunities, and experience. http://global-climatescope.org/results
India has made increased investments in clean energy installations, and has developed the world’s largest renewables auction market. (https://qz.com/india/1475736/india-is-now-a-world-leader-in-renewable-energy/)
Improvement in India’s start-Up Eco-System Ranking
According to StartupBlink, India moved up to 17th position in 2018 from 37th spot last year in the Start-up Ecosystem Ranking for 2019. India ranks 17 globally among 100 countries, based on the strength of its start-up ecosystem, according to StartupBlink, which tracks start up ecosystems on a number of parameters. https://inc42.com/buzz/india-rises-to-17th-spot-from-37th-in-startupblinks-startup-ecosystem-ranking/ It used data from startups, accelerators and coworking spaces registered on its platforms as well as data received from global partners such as Crunchbase and SimilarWeb.
“The cities with the most vibrant start-up ecosystems in India were found to be Bengaluru, New Delhi and Mumbai.
Claire Perry O’Neill, president of the 2020 UN Climate Change Conference (COP26), has expressed confidence in India’s crucial role in the climate negotiations and admitted that the “world doesn’t celebrate some of its technological solutions enough”.
“You have some of the most ambitious technological solutions being proposed, for example, how to produce low carbon cement, we don’t celebrate that enough. We don’t celebrate enough India’s work in areas like cooling, which is a huge global need for the world. So, as well as the negotiations, we are going to treat the UK COP as an opportunity to celebrate and to measure all of the other contributions that are being made to reduce emissions,” O’Neill said. https://indianexpress.com/article/world/world-doesnt-celebrate-indias-achievement-in-climate-tech-enough-cop26-president-claire-perry-oneill-6229648/
Others:
(i) Moving away in diplomatic engagements from the term “Asia-Pacific”, a term Foreign Secretary Vijay Gokhale has characterized as a colonial concept, to the term “Indo-Pacific” which is an inclusive and global concept, officially used by countries such as the United States, Australia, and Japan. The mind-set change that the term represents would help India pursue its economic and strategic diplomacy with greater leverage.
(ii) The Government has decided to set up three high-level committees to monetize 9,400 enemy properties. The exercise is likely to fetch about INR one trillion, equivalent to about one month’s total collection of GST Goods and Services tax).
Concluding Remarks
India does have many macro and micro economic challenges which are indeed being addressed by the Union and some state governments. Greater focus on these challenges by the stakeholders would further facilitate India’s progress.
Globally, there are disruptive technologies which would change the policymakers and players in all sectors.
As an example, six central banks are taking a joint look into issuing digital currencies in their home jurisdictions, hoping to offer a convenient and safe alternative to Facebook's Libra or China's planned digital yuan.
The Bank of Japan has joined with the Bank of Canada, the European Central Bank, the Bank of England and others to study use cases for digital currency issued by a central bank.
These banks fear that the entrance of digital currencies, such as Libra and the digital yuan, into international settlements will undermine the influence of existing currencies such as the pound, the yen and the euro.
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