The government announced key reform measures including abolition of the Foreign Investment Promotion Board (FIPB), cleaning up of the electoral funding process and a sharp cut of 5 percentage points in the tax rate for MSME sector, but Wednesday’s Budget 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.
With more than 90 per cent of the foreign direct investment proposals coming through the automatic route, finance minister Arun Jaitley said it was only logical to phase out the FIPB, the body which clears FDI plans up to Rs 5,000 crore. The government will announce more measures to attract FDI, reform labour laws and push digital payments.
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“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. FIPB was initially constituted under the Prime Minister’s Office during the economic liberalisation phase in the 1990s.
Over the years, the government allowed FDI to come into India without requirement of any prior approval.
FDI into the country 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 and balanced growth.
“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,” said William Foster, Vice President, Sovereign Risk Group, Moody’s Investors Service.
To push digital payments, the Budget 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.
The finance minister said the government will simplify labour laws into four codes on wages, industrial relations, social security and welfare and safety & working conditions.
Contrary to market expectations of a significant increase in capital support to state-owned banks battling high non-performing assets, Jaitley chose to stick to existing Indradhanush plan for improving their health. The government had earlier committed to provide Rs 10,000 crore of capital to PSU banks in 2017-18 as well as 2018-19.
“…some would argue that the FM has missed the nub of the economy’s problem—the ‘’twin balance sheet’’ crisis that yesterday’s Economic Survey pointed to. 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 capitalize a publicly funded ‘bad bank’ (that would take some of the worst performing loans off banks’ books) seemed eminently sensible but finds no mention in the budget. Besides, the piffling amount of Rs 10,000 crore allocated for bank recapitalisation might raise suspicions that the government is yet to fully recognize the enormity of this problem,” Barua said.
However, to deal with the bad loans problem, the government plans to introduce a new law enabling authorities to confiscate assets of defaulters within India.
The Budget further said that the government will permit listing and trading of Security Receipts issued by asset reconstruction companies, which will help in dealing with NPAs.