It’s still a lukewarm economy

Now that the wheels of reforms have been set in motion by the Centre, what is needed is an assessment of how effectively we are reaping the actual benefits of various policy announcements.

True, it will take time to build the momentum. Nonetheless, some intangible benefits have become tangible. For instance, the upswing in sentiment is unmistakable and the investment intentions manifest in campaigns such as ‘Make in India’ and ‘Digital India’ are encouraging. The measures undertaken to address procedural and administrative hurdles indicate seriousness to assure ease of doing business. In fact, foreign direct investment inflows have already been on an uptick.

Matter for concern However, what continues to remain a concern is the persisting slack in domestic investments. A sense of apprehension continues to grip members of India Inc and is reflected in Ficci’s latest Business Confidence Survey as well.

The survey results indicate that about 50 per cent of the respondents are still operating at below 75 per cent capacity; therefore, considering fresh investments doesn’t yet seem a feasible proposition to them. About 59 per cent of the companies taking part in the survey anticipated ‘no change’ or a ‘decline’ in their investments over the near term. Further, the survey results also reported that participating companies are still not optimistic about other operational parameters such as sales, profits and employment in the coming six months. This conforms to the financial results of corporates and is a worrying trend.

The Budget is round the corner and the customary pre-Budget consultations have already taken place. There are some specific points that we would like the Centre to consider as it gives shape to the forthcoming Budget.

Break the low cycle The cycle of low investment-low demand-low growth needs to be broken. The cost of credit has been one of the primary constraining factors for businesses and the Reserve Bank of India has cut the repo rate by 125 bps so far. The banks responded by initiating a reduction in their base rates; however, an effective and equivalent transmission needs to be assured. The Centre should consider fast-tracking the recapitalisation plans of public sector banks (PSBs) and initiate the review of small savings interest framework to enable banks to effectively pass on the policy rate cuts to their customers. In addition, the Centre should also address the issue of stressed assets of PSBs.

While Asset Reconstruction Companies are being strengthened, the Centre should consider setting up a National Asset Management Company that can take over large NPAs from the balance sheets of banks. This would release capital, provide banks with lendable resources and also help in lowering interest cost.

Going ahead, the Centre should also lay out an appropriate personal tax framework that can put greater disposable income in the hands of consumers. Given the subdued external demand, this will give a strong boost to domestic consumer demand and facilitate expansion of economic activities.

Further, providing quality and productive employment opportunities has been one of the biggest tasks. We have a huge youth population and converting that into the nation’s core strength is in our hands. While the Centre has already taken up the challenge, I would like to reiterate that Indians are an enterprising lot and we can achieve a lot by supporting this trait. The ‘Startup India Standup India’ initiative of is noteworthy; it appears that a policy for startups is being charted out. Towards this we would like to make two suggestions.

Heed this First, the Centre can look at introducing a rebated income-tax scheme for small called START (startup rebated tax) to encourage them and boost job creation. There should also be clarity in the definition of a ‘startup’. It is proposed that the government should establish the same in terms of initial capital, revenue and employment up to a certain threshold and for a specified number of years.

Second, the Centre should provide tax incentives to angel investors and venture capitalists for making investments in small startups. Several countries incentivise investments made in startups. The US allows 100 per cent tax exemption on capital gains income from investments in startup companies. It also allows rollovers on investments in small businesses and permits 100 per cent write-offs from the total taxable income on investment losses (up to $50,000). Similarly, Singapore allows deductions of up to 50 per cent of the money invested by angels into small businesses (up to $250,000). This will help promote the startup eco-system.

The government should also remain on course to simplify the taxation system and make it more equitable. We look forward to a reduction in the corporate tax rate in the forthcoming Budget. Also, as various surcharges and cesses are introduced for a limited period, the Centre should eliminate these once the purpose is achieved. This will also bring down the effective tax rates.

In addition, the Centre should aim at widening the tax base; for this, incomes above a certain threshold need to be taxed irrespective of source.

Next, given the huge fund requirements for the infrastructure sector, the government may consider launching funds similar to the National Investment and Infrastructure Fund, perhaps with other countries as co-investors. Such funds can be managed by professional fund managers and leveraged multiple times by providing equity for large projects across sectors.

Finally, extremely high priority plans are needed to encourage domestic production and reduce reliance on imports of coal, capital goods, electronics, fertilisers and defence products. We need to encourage the creation of domestic capacities of global scale and size, and work aggressively to establish a foothold in global supply chains. A beginning has been made in this direction. We need to follow up on these plans aggressively.

In order to give wings to our growth aspirations, it is imperative to make an honest assessment of the concern areas and take earnest action towards addressing the issues.

The writer is the secretary-general of Ficci

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