U.S. policy wonks react cautiously to India's Budget

A woman stands as she watches a screen displaying a television channel live broadcast of India's Finance Minister Nirmala Sitharaman presenting the 2020 union budget, at the Bombay Stock Market (BSE) in Mumbai on February 1, 2020. (Getty Images)

WASHINGTON D.C. — America Inc., and leading policy wonks who follow India’s economy closely have reacted cautiously to Indian Finance Minister Nirmala Sitharaman’s 2020-2021 Union Budget, appreciating some of the envisaged reforms but bemoaning the lack of increased foreign direct investment allowances in areas such as insurance.

Nisha Desai Biswal, president of the U.S.-India Business Council (USIBC), which boasts of over 350 corporate members doing business in India, including over 100 Fortune 500 and Fortune 100 members, said, “The USIBC welcomes the Government of India’s 2020-2021 Union Budget, which introduces a variety of reforms to promote investment and enhance the ‘Ease of Doing Business.’”

She said, “Coupled with major policy announcements unveiled by Prime Minister Narendra Modi last fall, the government has taken notable steps to stimulate India’s economic growth in the years ahead,” and acknowledged, “As the first full-year budget since Prime Minister Modi’s reelection in 2019, the 2020-21 Budget provides important insights into the government’s priorities for the next four years.

“USIBC was particularly pleased to see the Budget address a number of areas where the council has urged reform on behalf of its members,” Biswal said, and cited the efforts “to double farmers’ income and develop a technology-enhanced agriculture ecosystem, a renewed commitment to transportation infrastructure through the National Infrastructure Pipeline, investments in advanced and emerging technology, and expand connectivity, technology, and smart cities that will underpin India’s $5 trillion digital economy.”

She also said, “We welcome the government’s decision to abolish direct dividend taxes and streamline the process for Goods and Services Tax (GST) filing, which will ease compliance burdens and make India a more attractive investment destination,” and acknowledged, “our members also positively note the new Tax Dispute Resolution Scheme, and anticipate implementation of mechanisms that improve tax predictability and certainty.”

But Biswal said that USIBC “had hoped to see an increase in the foreign direct investment (FDI) allowance for the insurance sector in the budget proposal,” and hence “we look forward to continued engagement with the government on reforms that are needed to bring fresh investment in a critical sector.”

She said America Inc., is cognizant “that India is operating under fiscal constraints,” but that “the council continues to advocate for greater investment of resources to modernize India’s defense industry and shore up the auto manufacturing sector,” that could catalyze and be “a critical driver of India’s growth.”

Biswal also expressed the council’s concerns “about the many new tariffs, fees, and cesses(which are taxes earmarked for particular purposes) introduced in the budget. These new tariffs touch agricultural goods, medical devices, automobile parts, electronics and electric vehicles.”

She pointed out that “both the USIBC and the U.S. Chamber (of Commerce, the parent body of the USIBC, and the largest and most powerful trade organization in the U.S.) have long maintained that tariffs raise prices for consumers and create friction with trade partners, ultimately inhibiting economic growth.”

But Biswal, apparently not wanting to sound overly critical and instead sounded a note of sanguineness, and opined that since the USIBC “has been a part India’s growth story for 45 years since our founding in 1975, we believe that the economic outlook is strong, and India will remain a global destination for business and investment in the decades to come, and we look forward to serving as a partner in that growth.”

Meanwhile, the U.S.-India Strategic Partnership Forum (USISPF), said it was “pleased to see a focus on inclusive growth, aspirational India, ease of living for all citizens, and digital technologies for economic growth in the 2020 Union Budget.”

However, it’s president Mukesh Aghi, echoing the sentiments of Biswal, said, “We believe the budget could have gone further to liberalize sectors such as insurance that are in need capital.”

But he too agreed, “Despite a slowdown in growth, the global outlook for investment in India remains strong and therefore the budget was a great opportunity to convert the global sentiment into action.

 “On corporate taxation, we are particularly pleased to see the elimination of the dividend distribution tax. Deferring the significant economic presence rules is an applaudable effort to align India’s digital taxation policy with global norms,”Aghi said, and added, “On ease of doing business, measures such as simplified GST returns, no audit requirement for MSMEs with up to INR 5 crores turnover, instant issuance of PAN by furnishing Aadhaar, pre-filing of tax returns, faceless appeals and assessments will further enhance India’s image from an ease of doing business perspective.”

Thus, he said, “Together, these steps show that India’s tax policy is moving in the right direction.

 “Directionally, we see provisions such as creation of an ‘Investment Clearance Cell’ to facilitate investment advisory and continued focus on smart cities projects and electronics manufacturing playing an important role in growing the Indian economy and creating much-needed jobs.”

Aghi recalled that “as a USISPF hi-tech manufacturing report has indicated, India’s hi-tech manufacturing sector has the potential to offer an additional investment of $ 21 billion and create 550,000 direct jobs and 1,400,000 indirect jobs over the next 5 years.”

Nonetheless, he reiterated and urged that “the government to move away from further tariffs on ICT products in the budget,” arguing that “it is important for government to continue to improvise its Make in India program. Global companies are looking for alternative sites in Asia and India is uniquely placed to be that destination.”

Aghi, also in infusing some optimism, said, “We are also encouraged that the government is taking measures to boost infrastructure spending, creating a national logistics policy, and modernizing India’s connectivity.

He also said, “We are encouraged to see a focus on digital infrastructure that will enable private sector to build data center parks throughout the country as well as public funding for the Bharatnet program.

“The government’s attempts to bolster public consumption through tax holidays on the profit earned on affordable housing projects, optional tax relief to middle income tax payers, rationalizing the tax rates and increasing the disposable income in the hands of the middle class are welcome moves,” he added.

Aghi pointed out, “Startups continue to be the engines of growth for the Indian economy— deferring the tax payment on ESOP granted to employees; and increasing the revenue threshold to INR 100 Cr for claiming profit exemption for a period of three years out of first 10 years will allow startups to create jobs and attract more skilled talent,” and assured New Delhi that USISPF “will work with the government on additional steps it can take to further boost the startup ecosystem in India.”

Calling e-commerce “a bright spot of the Indian economy,” he urged the government reconsider its decision to impose 1 percent TDS on e-commerce, saying that “this creates differential treatment of sellers on these platforms and the burden will be ultimately passed on to the consumer.”

 But Aghi also chimed in that “given the political and fiscal constraints facing the government, we compliment Prime Minister Modi and Finance Minister Sitharaman for balancing different priorities.”

Rick Rossow, Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS), who spent several years at the USIBC in an earlier incarnation, and is a much sought after policy wonk on all things involving India’s economy and U.S.-India trade, said, “I am less pessimistic about the Indian economy.

“Sure, the current growth numbers are depressed, and even those predicting growth are looking at a sluggish recovery,” he acknowledged. “But few international agencies are talking about a further slowdown. And foreign investment continues to flow into India at record levels.”

Consequently, Rossow said, “People are willing to bet real money on India’s mid-term and long-term growth.” 

“Most of all, while the pace of reforms have slowed since mid-way through the Modi government’s first term, they are not taking steps to harm the economy — unlike some steps we saw near the end of UPA-2 like retrospective taxation, the onerous Land Acquisition Act, and the 2 percent corporate social responsibility tax in the Companies Act,” he said.

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