Global economic scenario today determines the economic strategies to be adopted by countries. The scenario is so unpredictable and gloomy, countries should focus on economic growth and job creation to maintain balance in the economy and ensure the stability of the economic and financial systems. India has the potential to grow at 8% and all action plans to be adopted by the government could be derived from setting it as the objective.
Financial systems in a country play the role of an anchor in the overall development and any problems in their stability will have a bearing on the overall performance of an economy. The developments in the financial services sector in the last few months was a setback to the Indian economy and the economic growth.
The budget by the Central government is addressing the needs of accelerating the economic growth and bringing back the stability and vibrancy to the financial services industry, which will help to kick-start the process of balanced economic growth. Increasing the liquidity in the economy across the sectors will also help the cause.
The Government has proposed a number of reforms with a strong focus on investment in infrastructure development, digital economy and employment generation in medium and small enterprises by stimulating growth, promoting digitisation, transparency and simplifying tax administration.
The projection for growth of tax collections and the target for growth is one of the lowest in the recent times. There is a need to mobilise resources from new non-conventional sources of funding.
The proposal to examine suggestions on opening foreign direct investment (FDI) in several sectors, including aviation, media, animation and insurance sectors will go a long way in bringing long-term funds to the Indian economy from other parts of the world.
There is a Proposal to merge NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment (FPI) Route to provide NRIs with seamless access to Indian equities.
This is a great proposal and by bringing in policies for effective implementation of this scheme, we should be able to keep the interest of FPIs and NRIs in the Indian market and action plans have to be identified for tapping the funds from these sources.
In the railways sector, the proposal is to focus on Public-Private Partnership (PPP) for faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight service. Indian Railways is one of the largest land owners in India.
Large part of the funds required for development of railways can come from capitalisation of the land bank as well as investment from private partners.
The proposal that Securities and Exchange Board of India (SEBI) will consider increasing the minimum public shareholding in the listed companies from 25% to 35% will force existing companies that are doing well to go to the market for dilution and take away funds required by enterprises which need the funds most. This proposal could be reviewed. As and when the financial system and economic system stabilise, this proposal could be introduced.
Few of the proposals in the budget also resulted in investors turning positive towards investment in debt and negative in investing in equity. A survey could be done on investor sentiments and required amendments could be made in the proposals so that their sentiment in stocks and stock markets come back to normal levels. When we are planning to increase the level of financial intermediation, there is need to make investments in financial instruments attractive.
To continue the policy of disinvestment in non-financial public sector undertakings and consider holding less than 51% stake in such undertakings on a case-to-case basis is a brilliant proposal. Most of the PSUs hold valuable property. Companies like MTNL have assets which are highly valuable compared to the debt they have.
Before such dilution, the scope for capitalising the assets through REIT/InviT Structure could be looked at apart from sale of some of the prime properties in the large cities.
In many cases, capitalising the prime property will make sick companies very healthy. The Government plans to invest INR 100 trillion on infrastructure in the next five years.
An expert committee is to be set up to study the current situation relating to long-term finance and India’s past experience with Development Finance Institutions (DFIs), and recommend the structure and required flow of funds through DFIs.
Another promising proposal is to launch a scheme to invite global companies to set up mega-manufacturing plants in advanced technology and provide them investment linked income tax exemptions under section 35AD of the Income Tax Act, 1961, and other indirect tax benefits.
In the last few years, the capital investment in the economy witnessed a sharp decline and especially in the private sector, there was very less capital investment. In the last few months, the capacity utilisation has come down below 70% after crossing 75% a few months back.
This was also partly due to consumer expenditure declining in sectors like auto and housing, which were mainly relying on external funds. The banking credit flow to many sectors are also developed.
There is a need to boost the consumer sentiment which will help to shore up the demand for many products. This will help to increase the capex in several sectors.
The policies proposed in the budget will go a long way in boosting the sentiment of investors, consumers and corporates. To realise the full potential, effective implementation, continuous monitoring of the impact of implementing the policies and bringing fast course corrective actions during implementation will go a long way achieving the objectives set by the government.
R Kannan is Head, Corporate Performance Management, Hinduja Group. The views are personal.