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India's new budget opens doors to foreign investors

Publication Date : 11-07-2014


India's new government has set out to correct the course of the economy through its first budget, announcing a big push for new infrastructure, raising some foreign investment limits and focusing on financial discipline.

The budget presented yesterday to parliament by finance minister Arun Jaitley did not contain the kind of big-bang reform measures that sections of industry and the financial markets had been expecting.

However, they gave Jaitley's maiden effort a thumbs-up, saying he had been practical and pragmatic considering his Bharatiya Janata Party had been in power for less than seven weeks and had inherited a troubled economy.

"India unhesitatingly desires to grow," Jaitley told parliament.

"The steps that I will announce in this budget are only the beginning of a journey towards a sustained growth of 7 to 8 per cent or above within the next three to four years…

"Therefore, it would not be wise to expect everything that can be done or must be done to be in the first budget presented within 45 days of the formation of this government."

Jaitley emphasised the need to enhance economic activity and addressed a key concern of foreign investors on tax. He said the government would not apply a controversial law made by the previous government in 2012 that allowed companies to be taxed retroactively.

Disputes that had arisen from the application of the law would be examined by a high-level panel before the tax authorities could act against companies, he said.

"I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour," he said.

The policy of the new government is to promote foreign direct investment (FDI) in select sectors, Jaitley said, and raise the cap on FDI in defence manufacturing and insurance to 49 per cent from 26 per cent.

As well, rules on FDI in real estate and manufacturing are to eased to help develop "smart cities" and boost business.

Prime minister Narendra Modi wants to develop 100 smart cities to deal with India's rapid urbanisation, and Singapore has offered to build some of them.

Jaitley said he was providing 70 billion rupees (US$1.13 billion) during the current financial year for the project.

The finance minister also sought to encourage foreign fund managers - who have invested US$130 billion ($129.60 billion) in India but stay abroad for fear of India's tax laws - to move to India.

To help this, he said, India would treat their income from transactions in securities as capital gains, which are taxed at a lower rate than income.

Some analysts, however, said they were disappointed by what they called a lack of clarity in the government's FDI policy.

As expected, Jaitley's Budget had a strong focus on infrastructure. He said the government would spend 80 billion rupees ($1.33 billion) to expand rural housing and 450 billion rupees ($7.49 billion) for urban infrastructure facilities such as public transport, waste disposal and drinking water.

Sixteen new port projects will be awarded this year and new airport projects will be launched.

Days after plans for a high-speed rail network were revealed, Jaitley announced the government would spend 379 billion rupees ($6.31 billion) to build roads and add 8,500km of national highway in the financial year ending March 31.

Although Jaitley did not target India's large food and petroleum subsidies or the expensive job and food guarantee welfare measures of the previous government, he said they would be overhauled to become productive and reach only the needy.

The budget triggered sharp swings in the stock markets, but the Bombay Stock Exchange benchmark index closed only 0.3 per cent down. Industry leaders were largely positive.

"Through this budget the finance minister has set the ground for repair of the economy," said Sidharth Birla, president of the Federation of Indian Chambers of Commerce and Industry.

"He presented the budget in a very difficult situation, and what we have is a set of progressive announcements that will be the key building blocks for engineering a turnaround in the growth trajectory over the next two to three years."

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