In a world of political uncertainty, foreign investors were generally pleased that the Indian budget was about battening down the hatches and decreasing risks. New Delhi’s decision to keep its fiscal ship in order, pour money into infrastructure and streamline its tangled taxes went down well at a time when global capital is fleeing emerging economies.
A foreign investor, says Shailesh Kumar, Asia analyst for Eurasia Group, would have wanted “continued reduction in fiscal deficit as this would showcase dedication to macro fundamentals, a reduction in corporate taxes, increased capital expenditure in infrastructure as that’s the only thing driving growth”.
A tax on long term capital gains and/or an extension of the definition of capital gains would have spooked investors, he adds.
Finance minister Arun Jaitley sailed close to the shore on all fronts. The fiscal deficit at 3.2% of GDP was within market expectations.
The corporate tax cuts happened, even if limited to MSMEs, and there were big bucks for infrastructure and the rural sector. How much of the money would go to capex and to a “real rural push” is one of the things we looked out for, says Rahul Sabarwal of the Soros Fund.
Investors will also award points for the tax tweaks, many of them in the budget annexure, says Mukesh Butani of BMR Associates. “There were a lot of smart and well-thought out tax changes in the fine print,” he says.
Jaitley, while noting the world economy was set to grow, cited three external threats. In two of these, though he didn’t say that, the risks are exacerbated by the presidential loose cannon, Donald Trump.
One is the expectation of higher interest rates by the US Federal Reserve and the knock-on capital flight from emerging economies like India.
According to Indian officials, one of the reasons for not tampering with capital gains was the fear of outflows, especially given the uncertainty created by the Trump administration.
The abolition of the Foreign Investment Promotion Board was also designed to boost investor confidence though there was confusion as to whether this meant all FDI was now on the automatic route, including in sensitive sectors.
Jay Desai, head of Universal Consulting, believes Trump will be a dampener. “I think US businesses will defocus on Indian FDI for this year, for fear of being perceived as creating jobs outside the US,” he says. A more open door would be a useful antidote.
The second risk is the possibility of rising oil prices. The government’s ability to maintain fiscal targets has been largely thanks to the windfall of low crude prices. Jaitley hoped that US shale production would put a ceiling on prices irrespective of OPEC production cuts. He may be right. OilPrice.com noted the third week of January alone saw 35 shale rigs come on line in the US as prices inched up, negating much of OPEC’s cuts.
In this, Trump will be India’s ally. He is working to boost US oil and gas exports and issued his first executive order to that effect on his third day in office.
Three is the rising trade protectionism. Chief economic adviser Arvind Subramanian warned earlier that with domestic investment still slack, exports would be crucial for India to sustain its growth rate.
Trump’s broadsides against H-1B visas and generic drugs put two of India’s key exports in danger. Subramanian said India had assumed open markets too long and should now take a “leadership role” in global trade. For example, he said, “we need to push our FTAs with Europe and the UK” to compensate. This would help India offset losses in the US market with gains in Europe. India’s standing, to quote Jaitley, as a “bright spot” in the world can be exploited because, says Desai, “with Brexit, the UK and European Investors are now more likely to see India as an FDI destination in 2017”.
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