The year 2019 has been eventful for India. With two budgets being presented this year, the country came out with decisive policies in the face of economic and trade uncertainty.

Some key changes were made this year by the Ministry of Finance which have the potential to share the country’s future. These included a deep corporate tax cut and amendments to the IBC aimed at streamlining the insolvency process and protect last-mile funding. The Centre also announced a relief package of INR250 billion aimed to revive stalled housing projects, and no charges on digital mode of payments to promote a Digital India. Further, the Union Budget 2019 gave a boost to make electric vehicles affordable with a GST cut from 12 per cent to 5 per cent and the provision of additional income tax benefit of INR1.5 lakh on loans taken to purchase electric vehicles.

Emphasis was also placed this year on reducing the financial stress on farmers and offering them additional income opportunities. During the Interim Budget presented in February 2019, announcement was made for an INR6,000 annual income support to marginal farmers under the PM KISAN scheme. Similarly, the Union Budget presented in July 2019 proposed innovative pilot programmes on ‘zero-budget farming’, scaling up of rural infrastructure under the PM GSY scheme and incubators to develop 75,000 entrepreneurs in the agro-rural industry. Recognising the importance of capital for the country’s economic backbone – the MSME sector – a 2 per cent interest subvention on fresh and incremental loans was also announced during the Union Budget along with a partial credit guarantee was to public-sector banks (PSBs) for purchasing high-rated pooled assets of strong NBFCs.

In September, the Finance ministry set up a task force to build a national brownfield and greenfield infrastructure project pipeline worth INR100 lakh crore over the next five years. In the same month, the Union Cabinet approved 100 per cent FDI under the automatic route for contract manufacturing and commercial coal mining. The local sourcing conditions for single-brand retailers were also relaxed. Such norms are expected to reinforce India’s position as a potential global manufacturing hub and reduce its dependence on imports.

Realising that banks remain critical for ensuring credit flow and to maintain a conducive business environment, the Ministry of Finance announced a stimulus package with an upfront disbursement of INR70,000 crore for state-run banks and the merger of 10 state-owned banks to form four large banks. If implemented well, these moves can revitalise the banking sector and enable PSBs to compete more effectively.

Arguably, the ease of doing business is an area in which India has made the most significant strides in recent years. In 2019, India climbed 14 places to become 63rd among 190 nations in the World Bank’s ease of doing business ranking (up from 77th rank in 2018)[1]. According to the statistics published by the Department of Industrial Policy & Promotion, the country also attracted FDI inflow of USD27.2 billion during FY2019.[2]

India’s economic engine, however, hit a snag this year as GDP growth slowed, corporate revenue moderated, unemployment increased, urban wages and farmer income stagnated and consumption declined.

While the government has taken several initiatives to steer the meandering economy to the fast-growth lane, more work remains to be done on the policy front to shift India onto an accelerated growth trajectory. These reforms will have to include improvements to land and labour laws, a much more open trade regime and removing bottlenecks for accessing capital. The reforms could be supported with rationalisation of taxes with a GST 2.0, a stable regulatory regime and ensuring greater physical and digital connectivity across the country. Decentralisation of decision making by empowering states and creation of a coherent long-term vision could help guide the economy out of this slump.

Creating a conducive environment that will rebuild citizens’ trust in the economy, improve investor confidence, stimulate investments and integrate India into global supply chains would need to be taken up on priority. Furthermore, providing universal healthcare, easy access to quality education and electricity, developing transport infrastructure and addressing sustainability issues will be the foundation for India’s next stage of development. The country also faces immense pressure to create job opportunities for its large working-age population.

Despite uncertainties, the momentum of structural reforms is undoubtedly strong. The government has covered a broad gamut of trade and investment through its reforms. In many ways, 2019 has created the base for India’s future growth. The key would, however, be in the action that the government takes to ensure implementation such that India’s objective of a USD5 trillion economy is met.

 

[1] Doing Business Report, World Bank Group, 2020

[2] FDI Statistics, DIPP, June 2019

 

(A version of this article appeared in The Financial Express on December 20, 2019)

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