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Indian economy strong but implementation paralysis cause for concern
January 2, 2014, 11:03 am

Supreme Court advocate and former Director of the Reserve Bank of India, Homi Phiroze Ranina said that the Indian budget was an exercise aimed at creating a fine balance between the need for fiscal consolidation and the impetus to promote growth, hence there were no populist measures announced by Finance Minister P Chidamabaram.

Ranina was the keynote speaker at a though provoking seminar on Indian Budget 2013-2014 which was organised by Al Mulla International Exchange Company, the premier exchange company in Kuwait, in association with the Kuwait Chapter of the Institute of Chartered Accountants of India, at the Safir Hotel on 4 March, 2013. 

This is the last budget of Congress led UPA 2 government before India goes to general election to elect a new Parliament next year. And as such it has attracted considerable interest both in the political and financial world In an exclusive interview later with The Times, Ranina, a taxation expert, complimented  P. Chidambaram for bringing down the fiscal deficit to 5.2 percent of GDP for the current fiscal year and projecting a much lower fiscal deficit of 4.8 percent of GDP for the financial year 2013-14, “The finance minister had the unenviable task of presenting his proposals against the backdrop of a difficult economy, both on the global and national level. While the world economy faced the threat of lower growth, rising unemployment and unstable financial markets, the Indian economy witnessed its lowest growth rate of 5.5 percent.” 

Pointing a word of caution for the government, Ranina stated, “India would be downgraded from its present BBB rating, if it cannot bring down its fiscal deficit and push forward the reform agenda.” Adding that India’s current account deficit was also a serious problem, as imports have continued to exceed exports, the noted analyst said, “The current account deficit has crossed 5 percent of GDP and our exports have to go up. Unfortunately, the government continues to grapple with the problem and looks unable to find an immediate solution in view of the grim economic scenario in the world.”

Ranina said “It was also widely expected that the government would increase the limit of Foreign Direct Investment (FDI) in the banking and insurance sectors and announce credible disinvestment policy to make public sector units more competitive. But this did not happen and FDI looks likely to stagnate throughout financial year 2013-14.

“ FDIs are important as they provide a degree of stability to the exchange rate mechanism. The volatility that we have been experiencing in the rupee’s exchange value is likely to continue and the rupee will keep eroding, especially if Foreign Institutional Investors (FIIs) begin pulling out money and FDI do not begin coming in.” he pointed out.

On the larger picture of the economy of India, Ranina explained that it was not just policy paralysis but implementation paralysis that India was suffering “The inability to implement projects has been a major cause for slowing of development and decline in business growth in India. People want to invest but if project implementation are stalled or slowed down money will not percolate.  There are so many projects that are in the pipeline waiting for clearance that investors have become quite skeptical.”

Elucidating on the tax benefits in the budget, Ranina said, “The finance minister has resisted increasing the rates of minimum alternate tax and the dividend distribution tax. He has also avoided the expected inheritance tax, but the relief in tax of Rs 2,000 given to tax payers, whose annual income is less than Rs 5 lakhs, will be of little comfort given the rate of inflation that has been prevailing for the last two years. However, the surcharge on tax payers earning more than Rs 1 crore, which will have only a marginal impact on tax outgo, will not be begrudged by the super rich as it is imposed only for this financial year.”

Clarifying that there was no specific references to NRIs in the budget, Mr. Ranina added that the government was aware of the significance of NRI remittances to the exchequer and had in the past initiated several benefits to ensure steady overseas remittances.

However, on the influence of the budget on real estate demand, the former director of Reserve Bank cautioned that only if the RBI reduced its repo rate could banks offer lower rates to borrowers. “People were expecting interest rates to come down but that didn’t happen and until it does, we cannot expect real estate demand to pick up.”

Another hurdle, to real estate investments is the provision in the budget that says every buyer of property valued at Rs 50 lakhs or more, will be required to deduct tax at source at the rate of one percent. This is expected to come into force from the 01 June, 2013. However, in a move to placate the real estate sector and alleviate interest among lower and middle income groups, the current budget proposes to increase the deduction for interest on monies borrowed to purchase residential property, provided the loan does not exceed Rs 25 lakhs and the property value does not exceed Rs 40 lakhs.”

Ranina strongly advocated that Indian should move to non-cash based economy and said that ordinary people would stand to gain through digital transactions as it would eliminate counterfeit money and reduce corruption, as well curb funding for terrorism and other illegal activities. “The government needs to make a serious push for moving the economy away from its current cash-based environment.”

Concluding with an optimistic outlook for the Indian economy by pointing to its inherent strengths, Mr. Ranina said, “The Indian economy has in fact achieved the third highest growth in the world, after that of China and Indonesia. India has a sound industrial base and a very good financial system. This, along with the demographic dividend of the country, with 45 percent below the age of 30, makes India a very attractive investment destination.

Moreover, unlike China’s export led growth that was dependent on external sales, India’s economy growth is fueled by internal consumption. Also, India’s agriculture exports, which had reached record numbers last year and were steadily rising, have contributed to the country’s economic growth.

“ The finance minister needs to be especially commended for presenting a budget that ensures the country will remain a safe bet for foreign investors in the middle to long-term and that India’s growth story continues to remain sustainable,” he concluded.

The Times Report

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