Political stability has come at a time when growth is slowing. The government's budget has set the tone for its policy response, with the focus on investment, jobs, and infrastructure.
While the single-party majority mandate had set the foundation for a stable central government, significant headwinds potentially lie ahead. Domestic risks (such as slowing demand and poor health of the banking sector), together with external risks (from uncertainties around global trade), will likely impact business investment and credit growth, and thereby, growth.
The first budget of the Modi government’s second term was a tightrope walk balancing the need to boost growth, create jobs, and offer tax breaks without straining expenditure. In the backdrop of the finance minister’s mantra of reform, perform, and transform, the budget packed competing goals and a strong commitment to fiscal prudence.
Over the past five years, the government took myriad steps and implemented several ground breaking reforms, such as implementing the landmark tax reform, allowing foreign investment in restricted sectors, and reforming the bankruptcy law. By presenting a visionary budget with mid- to long-term benefits, the finance minister committed to continuity of previous policies.
To revamp the financial and banking sector, the budget proposed INR 70,000 crore (INR 700 billion) for bank recapitalization. It also recommended greater regulatory authority to the RBI over the housing financial sector and nonbank financial companies (NBFCs), which are the biggest sources for credit creation in rural India. In addition to the government giving partial credit guarantees to public sector banks, the budget offers certain measures specifically for the NBFCs to ensure they get funding from banks and mutual funds.
The central government addressed concerns related to job creation by giving small and medium enterprises (SMEs)—the biggest source of employment generation and grappling with a lack of access to funds and thereby growth—access to social security, quick loans, and an efficient payment platform to avoid payment delays.
To promote self-employment and skills, emphasized women’s participation in the economy and offered concessions to startups to encourage entrepreneurship. For job creation on a sustainable basis, she stressed on improving education (through introducing a new education policy, transforming higher education, and creating funds to promote research), skills among the youth (through encouraging the youth to undertake programs on artificial intelligence, big data, robotics, etc.), and popularizing sports.
In the making of New India, infrastructure development was given top priority. The finance minister announced an investment of INR 100 lakh crore (INR 100 trillion) over the next five years, with the focus on improving the railway, building local infrastructure for water sustainability, and bridging critical infrastructure gaps in the agriculture sector, among others.
The recent historic measure
of Finance minister Nirmala Sitharaman, aiming to lift business sentiment and
spur investments, slashed corporate tax rate – to 22% from 30% for domestic
companies – and proposed a competitive 15% rate for new investment in
manufacturing. In effect, she offered a Rs 1.45 lakh crore fiscal boost, also
sending a strong signal the government will take all steps needed to revive
growth.
Despite slowdown all over the globe, due to the intrinsic strength of the domestic market/corporates duly supported by the strong & sensitive central government there is only scope to bounce back slowly and surely.
