Any multinational looking for solid growth should be taking a hard look at India at a time when economic growth in the developing world remains weak and China’s economy is slowing. Indeed, in 2015, India’s economy will grow faster than China's for the first time in 16 years, helped by policy reforms aimed at encouraging investment, according to the IMF. It forecasts China’s GDP growth will slow to 6.8% this year and 6.3% in 2016, while it expects India’s to expand by 7.5% in both years.
India’s policy reforms were outlined in the government’s 2015 Union Budget. Analysts agree that the focus on long-term reform and investment in infrastructure might make for a slower economic recovery than a more short-term, populist policy of stimulating demand through tax cuts would have done, but the budget is intended to build industry, investor and consumer confidence in a sustainable future. Here in summary is how the new policies will affect different sectors.
Information Technology. The Digital India initiative to promote digitisation via investment in the electronics manufacturing sector is a measure to make India a more connected economy. A range of announcements has been designed to stimulate growth among start-ups and micro, small and medium enterprises (MSMEs), including schemes to ease the availability of credit and favourable tax treatment for local manufacturers of digital devices such as tablet computers. Higher Internet penetration and mobile Internet use, combined with advances in cashless merchandising, will promote e-commerce and m-commerce (while traditionally offline activities such as tax-filing and ticket booking will be nudged online). There are plans to make open Wi-Fi available at 400 railway stations across the country.
The IT industry is generally positive about the budget although areas of concern remain to be addressed, such as the tax and regulatory obligations relating to cloud computing where providers and users are operating in multiple jurisdictions and across geographic boundaries.
Fast-Moving Consumer Goods. Infrastructure investment also characterises budget announcements relating to the FMCG sector. The industry has been battling stagnant volumes and slow growth, but schemes to improve roads, railways and basic amenities and to bring electricity to the 20,000 villages across India that are still without it, along with measures to boost farm yields, should help to expand the FMCG market in rural areas. Although an increase in goods and service tax (GST) from 12.36% to 14% is likely to curb consumer spending in the short term, forecasts point to double-digit growth. Budget policies to promote health and hygiene, for example, should translate into higher sales of soaps and disinfectants, while a subsidy on liquid propane gas, used by many households, will raise disposable income and offer FMCG companies another opportunity to drive the penetration of branded consumer products.
Agriculture. Improving productivity is the main thrust of the government’s plans for agriculture, but infrastructure investment will play an important part here, too. The budget sets out plans to connect each of the country’s 178,000 unconnected habitations with all-weather roads, requiring the completion of 100,000 km of roads currently under construction and the sanctioning and building of a further 100,000 km of roads.
The government recognizes that agricultural incomes are under pressure and is using farm credit schemes and rural infrastructure funds as additional ways to foster the rural economy. It has committed itself to increasing the area of irrigated land and improving the efficiency of existing irrigation systems, and to enhancing productivity through the Soil Health Card Scheme. Under this scheme, cards will be issued to 145 million farm owners detailing the nutrient status of their soil and recommending nutrients and fertilizers for the crops they grow. The government has also reiterated the need to set up a Unified National Agriculture Market to help support farmers’ incomes.
Medical Services and Pharmaceuticals. Expansion of infrastructure in medical care will both improve medical services and boost the pharmaceutical industry. The All India Institute of Medical Sciences (AIIMS) is to build hospitals in Jammu and Kashmir, Punjab, Tamil Nadu, Himachal Pradesh and Assam. Numbers of medical colleges and physicians are likely to rise as a result, leading to earlier detection of serious diseases and increased rates of diagnosis and treatment. Pharmaceutical companies will also benefit from the extension of the visa-on-arrival scheme to 150 countries with the aim of encouraging medical tourism—a medical tourist brings in five times more foreign currency than a leisure tourist.
Inflation in the cost of medical expenses and treatment has been rising faster than overall inflation, emphasising the need for individuals to buy policies to cover these expenses. Steps to reduce the cost of health insurance should increase its penetration, which in turn might persuade insurance companies to include drugs in the list of items they will reimburse, making drugs more affordable for many people—another bonus for the pharmaceutical industry.
Automobiles. Despite expecting no direct short-term benefits from the budget, the automobile sector will, in common with other industries, gain from the government’s planned investment in infrastructure. The 100,000 km road-building programme will generate additional sales of cars and commercial vehicles, a welcome prospect after recent lacklustre sales figures. The introduction of GST from April 2016 will simplify vehicle pricing and see a standardisation of prices across the country, while the tariff on imported commercial vehicles will be raised from 10% to 20% under the Make in India initiative. The manufacture of electric vehicles will benefit from investment of INR75 crore (US$12.3 billion) and a waiver on duties.
Media and Entertainment. Neither incentives nor concessions have been offered to the media and entertainment industry. The budget contains none of the sector’s hoped-for tax benefits; instead, GST is to be levied on previously exempt entertainments such as theme parks, bowling alleys and amusement arcades so that customers will have to pay more—unless companies can absorb the increase. GST will also apply to advertising revenues, affecting broadcasters and publishers. On the upside, basic custom duties on certain components will help to reduce the prices of flat-screen televisions, which might help the penetration of television among low-income households and convert more households to flat screens. However, the impact of this on the media and entertainment industry will be long-term and indirect.
Telecoms. Although the finance minister said that boosting investment takes priority over reducing the fiscal deficit, the two went hand in hand when the government auctioned new spectrum to telecom companies recently. While the high revenues from the auction will help reduce the deficit, the higher levels of debt in the telecoms sector could trigger consolidation among companies and raise mobile voice and data tariffs for consumers. Reduced corporate taxes over the next four years could help to redress the balance by freeing up cash for investment, while policies announced as part of the Make in India initiative—including the continuation of additional duties on printed circuit boards and the doubling of duty from 6% to 12% on imported mobile handsets—should boost SMEs in the industry.
To promote financial inclusion among the poorer levels of society, the government is keen to encourage the use of mobile access for the digitisation of money, which will raise the level of cashless transactions. Nielsen studies indicate that up to 75% of India’s consumers are considering opening a payment bank account with their telecom service provider. At the same time, however, it is likely that the increase in service tax will affect mobile users, with higher costs for handsets, hands-free devices and memory cards.
Financial services. The theme of financial inclusion and the push to reduce the dependence of the poor on traditional moneylenders and the unorganized financial sector will be a key driver of growth for banks and other financial services companies. These will also benefit from the market for home loans that will be created by government plans to build 20 million houses in urban areas and 40 million in rural areas.
Infrastructure. The building of roads, ports, power plants and railways should see a significant impetus from the government’s proposed infrastructure spending of INR70,000 crore (US$11.4 billion), the equivalent of about 0.5% of GDP.
India’s decline in growth rates over the past four years can be attributed mainly to a 6% drop in investment as a percentage of GDP. The government’s new policies go only some of the way to reversing this decline and addressing India’s ailment of underinvestment. But the government has nevertheless outlined a clear path to inclusive and sustainable development that should reassure domestic business, international investors, ratings agencies and the country’s taxpayers.