16 Jul ‘Modinomics’: A Modest Start
In the wake of Indian Prime Minister Narendra Modi’s optimistic election campaign, investors are taking a close look at India’s new 2014/2015 budget, unveiled last week. Promising “good days” for India, the budget comes ahead of a new trade agreement due to be signed between ASEAN and India next month.
Implications for Business
The 2014/2015 budget raises caps on foreign direct investment. It relaxes various rules for foreign investors, who will notably be allowed to hold a 49 per cent stake in military and insurance firms, up from 26 per cent. The budget also promises an “investment-friendly taxation system”, though it does not lay out many details. By year end, India will, however, be implementing a goods and services tax, which aims to create a common market across Indian states and help attract investment.
In addition, the budget includes a proposal to rectify India’s “inverted duty structure”. Many finished goods imported into the country are taxed at a lower rate than the raw materials used by Indian manufacturers. This is due to the concessions granted to India’s free trade agreement (FTA) partners like ASEAN, Japan and South Korea. It means that foreign imports sell well domestically, but not Indian products. Lower tariffs on factory inputs could therefore boost several manufacturing sectors, such as chemicals and electronics.
However, some much-anticipated reforms have been left off the table. For instance, the budget does not address the issue of heavy subsidy spending, with the government only noting that an expenditure reform commission will issue a report later this year.
Mr Modi’s relatively conservative budget is no game changer, and the stock market’s lacklustre response proves this. Realistically, overhauling India’s economy will be a long and gradual process, not an instant transformation. However, Mr Modi’s government is signalling that the country is ready for business. Indian Finance Minister Arun Jaitley has pledged to raise the country’s economic growth to 7 or 8 per cent within three years, and limit the budget deficit to 4.1 per cent of GDP.
Southeast Asia’s governments are certainly expanding investment and service links with India. At next month’s ASEAN Economic Ministers meeting in Naypyidaw, Myanmar, the 10 member nations and India are set to finally conclude a delayed FTA covering services and investment. The new deal will allow greater professional mobility in a range of sectors, along with increased market access and protection for investors on both sides.
Photo Credit: PM Narendra Modi’s Official Flickr