Budget 2015: Three game changers for India’s economy

March 2, 2015

(Any opinions expressed here are those of the author and not of Thomson Reuters)

People watch television sets displaying India's FM Jaitley presenting the budget in parliament at an electronic shop in ChandigarhFinance Minister Arun Jaitley’s budget announcements were on expected lines and should satisfy the investment community, which was keen to see reforms that will kickstart India’s economy. Although the budget was slightly skewed towards the rural economy, we also saw important announcements for urban India aimed at stimulating growth and investment.

Three announcements stand out in my mind as game changers:

Goods and Services tax (GST) rollout by April 1, 2016 

I was expecting an announcement on GST rollout after hearing about the consensus between the centre and state governments. GST, which aims to rationalise state and central indirect taxes into a harmonized nationwide sales tax, is the biggest taxation reform in India and will boost overall growth. It is estimated that GDP growth could go up by anything between 0.9-1.7 percent after GST is implemented.

Gold deposit scheme 

India is one of the largest consumers of gold in the world and import as much as 800-1,000 tonnes of the metal each year. These imports have in the past resulted in problems on the external front, where the current account deficit expanded, leading to a heavy fall of the rupee. The finance minister said stocks of gold in India are estimated to be over 20,000 tonnes, and these are neither traded nor monetised.

Jaitley has introduced multiple measures to monetise gold, including the gold monetisation scheme, a sovereign gold bond and developing an Indian gold coin embossed with the Ashoka Chakra. Conservative estimates show that if 30 percent gold held by households is monetised, the value may be as much as $5 billion. It will be a game changer as it will incentivise banks to hold gold in deposits as part of the mandatory cash reserve ratio or the statutory reserve ratio. This may free up resources for productive or lending purposes.

Lowering of corporate tax

The proposal to lower corporate tax rate by 5 percent over the next four years will leave companies with more cash to pursue much needed capex to spur the investment cycle.

A lower corporate tax rate will, over time, lead to higher wages as there will be more foreign and domestic investment in the economy. It will also increase overall employment opportunities and stimulate competitiveness among Indian companies.

To summarise the budget, on the scale of 0 to 10 (with 10 being excellent), I would give it a rating of 9.

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