Will India become the fastest growing large economy?

26 March 2015

By Anubhav Mohanty

The Indian government presented its first full budget and its Annual Economic Survey (AES) in February 28th. The AES – a stock-take of the economy – projects growth in 2014-15 to be 7.4% and 8.1%-8.5% in 2015-16, which will make India the fastest growing large economy in the world.

IndiaBudget_GrowthChart_2

The growth rate projections, based on the revised GDP series, depend on the success of the government’s supply-side reforms. Meanwhile, the  budget continues to emphasise the government’s ‘Make in India’ programme, infrastructure development, ease of doing business and continued focus on social priorities and overall development needs of the country. Some of the key measures proposed  last week include a reduction in corporate tax rates, increased public spending on infrastructure and social security, and steps to make starting a business easier.

Inflation

In 2013-14, inflation was over 6%, but since then, it  has declined to 5.1% driven by low oil prices and deceleration in agricultural prices and wages. To keep inflation in check in the future, a Monetary Policy Framework Agreement has been concluded with the Reserve Bank of India which clearly states the objective of keeping inflation below 6%, and provides for the creation of a Monetary Policy Committee.

What’s in the budget for UK businesses?

The UK is one the largest investors in India, while India invests more in the UK than in the rest of the EU combined. Total trade with India has increased by close to 10% in 2013-14. Given the close links between the two economies, one of the important implications for UK business is how successful the government is in stimulating growth, and this budget provides an indication of the future prospects for the economy.

  • Corporate tax: Corporate tax rate will be cut from 30% to 25% over the next four years, though some of the exemptions will be eliminated.
  • Goods and Services Tax (GST) system: A nationwide GST system is expected to be put in place by April 1  2016. The timescale appears very tight. When introduced, this will replace a state-specific tax system for the most part and go towards simplifying the tax structure across the nation.
  • Simplification of the foreign investment regulations: To simplify the procedures for foreign investors, the budget proposes to eliminate the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments.
  • Investment in Alternate Investment Funds (AIFs): The government will now allow foreign investment in AIFs, which is an investment vehicle for real estate, private equity and hedge funds. To further promote investment in these funds, the government proposes tax pass through on these funds, i.e. the tax will be on investors in the funds and not the funds themselves.
  • Reduction in taxes on imported inputs: The government has reformed the duties and customs on a number of industrial inputs to reduce the cost of raw materials and address inconsistencies in the duty structure.
  • The ease of doing business: The government has  reformed the tax registration regime – online excise and service tax registrations will now be completed within two working days. The government has also recently launched an integrated online platform that combines 14 regulatory clearances and  plans to introduce a new bankruptcy code next year. There will be more to do though.
  • Visiting India: The visa-on-arrival scheme will be extended to 150 countries from 43, which will increase the ease of travel to India.
  • Public spending: The government has  allocated an additional 90 thousand crores rupees (£10 bn approximately) in building infrastructure, and modernising its roads and railway networks. It has also increased its allocation for new pension, insurance and social security programmes. The government will need to be wary of the fiscal implications of spending. In the interim budget, the government had set itself a fiscal deficit target of 4.1% of GDP. The government is confident of achieving this target. Further, it expects fiscal deficit to be 3.9%, for 2015-16 (compared to 3.5% proposed last year).

Overall,  this budget, presented in benign economic conditions, focuses spending and reform in the right areas while maintaining caution about the medium term prospects. Our long-term growth projections (see our Global Economy Watch and our World in 2050 publications for further details) indicate that India, with sustained structural reforms, has the potential to grow faster, on average, than China after 2020, and become the second largest economy in the world by 2050. 

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