The government of India had announced key reform measures, including abolition of the Foreign Investment Promotion Board, cleaning up of the electoral funding process and a sharp cut of 5 per cent points in the tax rate for MSME sector. However, the annual Budget presented last week, refrained from taking specific measures on the twin balance sheet problem of over-indebted companies and the banking sector hamstrung by a mountain of stressed assets.
India's Finance Minister Arun Jaitley said that with more than 90 per cent of the foreign direct investment proposals coming through the automatic route, it was only logical to phase out the FIPB, the body that clears FDI plans up to £ 500 million. The government will announce more measures to attract FDI, reform labour laws and push digital payments. "A roadmap for (abolishing FIPB) will be announced in the next few months. In the meantime, further liberalisation of FDI policy is under consideration and necessary announcements will be made in due course," Jaitley said. FDI has increased by 30 per cent to $21.62 billion during April-September this fiscal. Ratings agency Moody's said the Budget for 2017-18 was "fiscally prudent" and the steps on increasing FDI would bolster stable balanced growth.
William Foster, Vice President, Sovereign Risk Group, Moody's Investors Service, said, "Measures that effectively foster higher Foreign Direct Investment would be credit positive by bolstering stable and balanced growth and providing stable financing for the current account deficit. India's external vulnerability is currently low, a support to the rating." FIPB was initially constituted under the Prime Minister's Office during the economic liberalisation phase in the 1990s. The Budget also announced removal of various duties on machines used for electronic transactions, introduction of an Aadhaar-based payment system called Aadhaar Pay, strengthening payment infrastructure and grievance handling mechanisms, among others, all in a bid to push digital payments.
Jaitley said the government would simplify labour laws into four codes on wages, industrial relations, social security, and welfare and safety & working conditions. He chose to stick to the existing Indradhanush plan as opposed to market expectations of a significant increase in capital support to state owned banks battling high non-performing assets. "Some would argue that the FM has missed the nub of the economy's problem - the "twin balance sheet" crisis that the Economic Survey pointed at. This is the familiar problem of over-indebted companies' inability to service debt and the resultant strain on bank balance sheets that continues to worsen," said HDFC Bank Chief Economist Abheek Barua.
"The survey's suggestion to use some of the windfall from the note-ban to capitalise a publicly funded 'bad bank' seemed eminently sensible but finds no mention in the budget. Besides, the piffling amount of £1 billion allocated for bank recapitalisation might raise suspicions that the government is yet to fully recognise the enormity of this problem," he added.
