THE PROMISE OF INDIA | COUNTRY REPORT

If Indian Finance minister Arun Jaitley’s February budget presentation is any indication of where India is headed, the country may well become the global leader in economic growth.

In a report presented to India’s parliament the day before the budget presentation, Jaitley said that India’s economy was expected to grow at a rate of more than 8% in the 2015-2016 fiscal year, while consumer inflation would drop to between 5.0% and 5.5%. The report on the state of the Indian economy also indicated that India could increase public investments and still hit its borrowing targets. The survey added, however, that the country needed to adhere to its medium-term fiscal deficit target of 3% of gross domestic product. Noting that India had hit an economic sweet spot, the report suggested that the country had room for big-bang reforms.

“We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then,” said Jaitley. 

Three days after Jaitley presented the Modi government’s budget, Reserve Bank of India governor Raghuram Rajan cut the repo rate by 25 basis points, to 7.5%, with immediate effect.

The Finance Ministry and the RBI are finally on the same page. “This makes explicit what was implicit before—that the government and the Reserve Bank have common objectives, and that fiscal and monetary policy will work in a complementary way,” Rajan explained.

The new budget calls for more than $11 billion in spending on infrastructure projects such as roads, railways, ports. And it calls for five “ultra mega” power projects to meet growing electricity demand and reduce the country’s reliance on energy imports.

EASIER, AND MORE ATTRACTIVE

Even more important, the report proposes a new set of domestic laws and measures designed to streamline economic management, steps that should make doing business in India easier and more attractive.

“The bold decisions are to bring in a much-required bankruptcy law and a higher devolution of revenues to the states, distributing 42% of revenues to states compared to 32% earlier,” says Hiren Ved, director and CIO of Alchemy Capital Management in Mumbai.

As a result, states will have larger funds at their disposal and freedom to decide on how to spend this money. Ved explains: “Hopefully, the better-run states would use these additional resources to spend on useful capex [capital expenditure], as there are limitations as to how much a top-down approach would work in a country like India, where the state governments may belong to a different political party than the one at the center.”

One important implication of this decision is that it should now be easier for the Finance minister to convince all the states to go ahead and implement the GST [goods and services tax] regime—a single tax regime across the country.  “This [reform],” says Ved, “can potentially be a game changer for India over the next few years if implemented in the right manner, as optimal rates of taxes generate higher tax revenues for the government by bringing a large part of the economy into the tax net, benefiting the organized sector, lowering logistics costs, improving efficiency in manufacturing and overall ease of doing business in India.”