A much needed clean-up of Indias Augean Stables

A much needed clean-up of Indias Augean Stables

Foreign investors often complain about India's byzantine bureaucracy and demands for unaccounted cash to grease the system and speed up decision making.

Though ministers and senior bureaucrats in New Delhi no longer make such demands, there are reports that there has been little improvement in the lower bureaucracy and in some states. The clean-up in New Delhi was the result of individual rectitude and personal commitment of ministers and their staff. In his Budget presented on February 1, Finance Minister Arun Jaitley made good on Prime Minister Narendra Modi's election promise of bringing in institutional changes to clean up the system - even as he kept his other promises and delivered a growth-oriented Budget that pleased the stock markets, foreign and domestic investors, salaried tax-payers and most economists and analysts.

The Finance Minister, who reiterated his earlier statement that private investment remains sluggish despite incentives, has done his bit to revive the entrepreneurial instincts of private entrepreneurs, both domestic and foreign, by announcing a massive $90-billion infrastructure building programme that promises to beef up corporate top and bottom lines, create jobs and fuel a consumption and demand revival. He has also addressed the demand side by lowering income tax rates in the lowest slab from 10 per cent to 5 per cent.

This will put an additional Rs 20,000 crore ($3 billion) in the hands of consumers. Even a modest velocity of three - appropriate for India - will lead to a $9-billion rise in consumer demand and contribute significantly to a revival in demand. Even the Opposition, led by Congress Vice-President Rahul Gandhi, couldn't say much beyond calling it “anti-poor and anti-farmer”.

That's the standard fall back line of Indian politicians when they run out of concrete issues to beat the government with. That, to my mind, is the clearest indicator that Jaitley's Budget has taken the wind out of the Opposition's sails. We have analysed the Budget in detail in this edition of 'India Investment Journal'. So, I will use this space to list five main takeaways that will surely lead to greater business opportunities, easier processes as well as the institutional clean-up that foreign investors have long yearned for. Here goes:

1) Big push towards a digital economy: In keeping with the Narendra Modi government's goal of turning India into a largely cashless economy, the Finance Minister has pushed the digital button across the Budget. The most revolutionary move, arguably, is his announcement that Aadhar Pay, a merchant version of the payment system based on India's Universal Identify Card that is being given to every citizen, will be rolled out shortly. Since every Indian, even the poorest of the poor who may not have debit or credit cards and/or mobile wallets, will have this, it will provide a massive boost to digital transactions across the economic value chain. The target: 25 billion Aadhar Pay transactions in 2017-18. Meanwhile, the banking system will make available an additional 1 million point of sale (PoS) machines by the end of the next month and a further 2 million Aadhar-based PoS devices by September this year. This massive digital push, which is likely to be one of Modi's lasting legacies, a la Atal Bihari Vajpayee's highway building programme, will no doubt throw up humongous business opportunities for global FinTech companies.

2) FIPB abolished: The Foreign Investment Promotion Board (FIPB) has been abolished. Foreign investors had often complained that the board's processes hindered, rather than facilitated, their investment plans. Over the last few years, the Modi government has moved 90 per cent of all foreign investment proposals to the automatic route, ie, out of the purview of the FIPB. Now, even the remaining 10 per cent of foreign investment proposals will be spared the pain of approaching it. I hasten to add a caveat here: We still don't know what mechanism will replace the board. So, on this count, at least, we'll have to hold the champagne for now. But I hope it will mean less bureaucracy at the very least.

3) Blow to the shadow (black) economy: The issue of political funding has been a contentious one across the democratic world - from the US to the UK to Japan and India. The biggest issue has been: how to keep slush money out of the political system and how to ensure that illegally generated funds are not used to buy political favours. The Budget has capped anonymous cash donations to political parties at Rs 2,000 ($30). Any amount beyond this has to be paid by cheque or a new bearer bond to be floated by the Reserve Bank of India. This is a novel initiative by Jaitley and its success or failure will be tracked closely by governments and political analysts around the world. This is how it will work: Potential donors can buy by digital transfer, bearer bonds up to any amount from a designated Indian bank and donate the same to political parties of their choice, which can then encash these at designated bank branches. Thus, only the receiver will know the identity of the donor but the cash component, usually siphoned out of companies, will be replaced by tax-paid funds remitted through the banking system. These two measures will almost certainly clean up India's political funding system in large measure.

4) Ban on cash transactions beyond Rs 3 lakh ($4,500): The Finance Minister has banned all cash transactions, which are used even for legitimate transactions in the informal sector, beyond Rs 3 lakh ($3,700). This, along with GST, which will be rolled out from July 1 this year, will bring large parts of the informal economy into the tax net and reduce corruption in the system and address a major pain point for foreign investors.

5) Massive rise in spending on infrastructure and rural development: A consumption-led revival of the investment cycle is sine qua non to lift India's growth rates. Jaitley has greased the wheels of the economy by promising to spend $90 billion on infrastructure and rural development. He has allocated $60 billion for building and upgrading India's creaking infrastructure. Of this ($38 billion has been allocated to the transport sector - railways, roads and highways and internal waterways. Then, he has allocated another $30 billion for rural and agricultural development. This will spur growth in rural incomes and buoys the rural economy, which accounts for 46 per cent of the Indian GDP. Rising rural prosperity is a key pre-requisite for high GDP growth rates and analysts say Jaitley has hit the bulls eye with this move. Not only will these investments result in large contracts to foreign and Indian companies and consultants, they will also generate jobs that can fuel a consumption-led demand revival. And taken together, they will lead to a cleaner, less cash-dependent economy where strong institutional processes prevail over individual discretion, thus, leading to more predictable and faster decision making.

Manoj Ladwa is the founder of India Inc. and chief executive of MLS Chase Group @manojladwa

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