India to Rationalize Taxes, Boost Infrastructure Spending

Narendra Modi seeks to make good on his campaign promises to liberalize the economy and boost growth.

Arun Jaitley, India's finance minister, speaks at the World Economic Forum in Davos, Switzerland, January 22
Arun Jaitley, India’s finance minister, speaks at the World Economic Forum in Davos, Switzerland, January 22 (WEF/Jolanda Flubacher)

Arun Jaitley, India’s finance minister, unveiled a series of tax reforms and infrastructure initiatives on Saturday in the conservative government’s first full budget since Narendra Modi came to power last year.

Jaitley said a national sales tax would be in place by April next year to replace a complex regime of local fees that hampers business growth.

He also announced a reduction in the corporate income tax rate from 30 to 25 percent and a simplification of the code.

Both measures should help Modi meet his campaign promises to liberalize the world’s tenth largest economy and boost growth rates.

Late last year, he rationalized the country’s labor inspections system to root out favoritism and abuse.

Before Jaitley presented his budget on Saturday, Britain’s The Economist pointed out that many of India’s labor laws date back to the 1940s. One stipulates that companies with more than one hundred workers need government permission to scale back or fold.

Many Indian businesses stay small in order to remain beyond the reach of the laws. Big firms use temporary workers to avoid them.

With ten million Indians joining the jobs market every year, and only a fraction of workers enjoying full benefits and security, comprehensive labor reform must be a priority, the magazine said.

Another is infrastructure. According to a survey cited by The Economist, half of Indian manufacturers suffer power cuts lasting five hours each week.

Inefficiency is rampant throughout the power network, stretching from Coal India, a state monopoly, to electricity distributors.

Earlier this month, Jaitley argued that energy subsidies were unsustainable and he defended the government’s auctioning off of coal mines to raise efficiency and bring prices down.

On Saturday, Jaitley said he would delay bringing the deficit under 3 percent of economic output until the 2017-2018 fiscal year in order to prioritize investment in roads, railways and irrigation systems.

Spending on infrastructure is set to rise from 11 to 14 percent of total spending and the government promises to relax regulations to encourage more private investment as well.

The budget seeks more foreign investment in general which grew 26 percent last year to reach $35 billion.

Quartz reports that the budget proposes to eliminate distinctions between different types of foreign investment.

Foreign portfolio investments, which are investments in securities and other assets, and foreign direct investments, which are mainly controlling stakes in businesses. Overall, this means less of administration hassles.

India’s financial press praised the policy changes. Surjit S. Bhalla described the budget as a “giant step forward” in the Financial Express, arguing that India was finally moving “toward being a modern state” that is “pro-growth.” The Economic Times was less slightly jubilant, describing the budget as short of revolutionary while applauding the finance minister for trying “to fix the nuts and bolts that were irritants in the financial markets.”

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