UKIBC CEO Richard Heald’s thoughts on the Budget 2020

India’s Finance Minister Nirmala Sitharaman announced her the union budget on February 1st.

Up front, UKIBC is a firm admirer of the Finance Minister, having interacted with her first as Commerce Minister. She is sensible and serious.

That said, the Budget address was a real chance to re-establish the Indian Governments economic credentials against a background of an Indian economic slowdown.

UKIBC have publicly called for a clear narrative within the budget showing a realisation of the enormity of the challenge – domestically and externally – and how they intend to deal with the multiple issues impacting on the Indian economy.

This did not happen explicitly and that was disappointing. Also disappointing is that the Indian Budget reverted to a 2 ½ hour monologue of statistics rather than a communication of a vision supported later by more details.

And yet I think that this was a budget full of subtle messaging some good some and not so good …

The “good” includes substantial realisation of the problem and the attempt to create “wiggle room”. Since last June, UKIBC has advocated for a relaxation of official fiscal targets. Relaxation of fiscal deficit expressed as a % of GDP increased to 3.8% – big tick (though reducing to 3.5% in 2021 is challenging). That tick also includes the repeal of Dividend Distribution Tax which increases the RoC of investing in India, the raising of FIP cap to 15% and the Sovereign Fund Investment allowances. We presume that this latter announcement is directed in part towards the NIIF sub-funds where ADIA has already declared that they will deploy their NIIF investments towards infrastructure in Kashmir.

There are areas on which the UK should focus. The announced investment in airports, relaxation of FDI in the educational sector (though admittedly seen alongside a definition of what FDI means and the introduction of the Foreign Education Providers Bill) and the renewable energy opportunities arising out of the development of Indian Railways.

Investment in infrastructure (Rs 1.7 lakh crore) – particularly railway, roads and airports – will support international (as well as domestic) trade. At a more micro level, mapping and geotagging of warehouses and cold storage will develop the cold storage chain across the country for example. These are necessary investments that will help India to attract the FDI it needs.

The FM highlighted the important role that the digital revolution will play in delivering services to the Indian people. Thanks to the UK’s expertise in IT, AI and data, the UK can support India’s digital platform. Read our Data report for more on those opportunities and challenges in UK-India digital collaboration.

The “not so good” includes the Personal Tax Regime. We called for a simplification of the slabs and a reduction in the marginal tax level which is, with all the “bits” some 42%. There are some 80m people who could file tax returns. Reducing the marginal tax levels – versus tinkering with the lowest levels – would remove the incentive to avoid taxation.

Also “not so good” was the raising of import tariffs in areas such as certain dairy products to encourage domestic production and employment. This sends the wrong message particularly at a time when there are calls for a reduction in tariffs to exploit the supply chain disruption which will increasingly impact on China.

And where was the much-heralded increase in FDI limits in insurance? True, it can be enacted via an amendment to existing legislation, though bureaucrats we spoke to indicated that the decision was still not taken due to domestic opposition. We hope that we will not see the previous drawn out process when FDI limits moved from 26% to 49%.

The Government has placed a big bet on disinvestment receipts. Historically, the Government has consistently missed its own disinvestment targets … frankly as did the Opposition Party when they were in Government. The Centre appears serious now. Air India is being offered with its debt being written off. BPCL and Container Corp of India are further attractive assets. The announcement of an IPO of LIC represents a litmus test of Indian intent – an ostensibly profitable company with opaque governance and processes. The India public and institutional investors will no doubt pour over the details of the investment offering.

The mood music in India is undoubtedly muted. And yet the latest quarterly earnings number in key manufacturing segments shows some resilience. Major Indian promoters speaking at Davos also indicate a stabilisation. The World Bank is projecting a GDP growth at end of 2020 at some 6%.

In sum, the budget might not be all that remarkable or answer every question that businesses and consumers hoped it would, but some key growth areas have been highlighted, for which the government should be praised. That includes investment areas with multiplier effects, including infrastructure, healthcare, rural development and education, and a focus on job creation.

How these priorities develop will depend on whether the Government’s plan can translate in reality. It is therefore important to underline how UK trade and investment can help India to achieve its targets and how UK companies can ensure they play a key role in that. UKIBC will support UK companies to do just that, through out networks, advocacy, and intelligence in the Indian market.

Over the past few days, UKIBC has engaged constructively with both Shri Piyush Goyal, Minister of Commerce and senior officials within the Prime Minister’s Office putting business views on how to improve the commercial operating environment in both India and the UK.

Footnote – we should remain mindful that many key areas of change and improvement lie outside the scope of the Budget and the Finance Bill. GST amendments are within the purvue of the GST Commission and land and labour reforms are the responsibilities of their respective Ministries. It is to be hoped that the subtle messaging that we feel is implicit in this budget is a sign that we might expect further action in other areas of the Centre.