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World Financial Planning Day
2nd Oct, 2019

World Financial Planning Day

Starts at 10:30 am Delhi Campus

CFA<sup>®</sup> Program & Road Map to Career in Finance
28th Sep 2019

CFA® Program & Road Map to Career in Finance

10 am to 12 pm ICoFP, Gulab Bhawan, New Delhi

India’s Roadmap for 5 Trillion Economy

October 5, 2019

India is currently a $2.8 trillion economy; to reach the $5 trillion mark by 2024, the economy would require nominal growth in dollars, of over 12% per annum. That is a challenge to accomplish, owing to the inflation, slow pace of investments and trade tension between the two major global economies. The union budget presented on 5th July laid down several ways for this target to be achieved till 2024.
How the budget laid down the road map:

roadmap indian economy - India's Roadmap for 5 Trillion EconomyFiscal consolidation: Fiscal deficit of FY20 stood marginally better at 3.3%. Though lower, GST collection and income tax collection (increased tax on super-rich) will help the government to meet the targets.

  • 10% surcharge hike on 25% from 15% income of up to Rs.2Cr.; 22% surcharge hike on 22% to 15% on Rs.5Cr. and
  • Corporate tax with a turnover of up to Rs. 400Cr. slashed to 25 percent from a current rate of 30 per

Divestment target: Revised to INR 1050bn from INR900 bn and to modify the present policy of retaining 51% stake in PSUs. Strategic disinvestment of Air India proposed to be re-initiated.

MSME: MSMEs play a key role in economic growth, job creation and local development: The sector employs around 11.7Cr. people, constituting 40 percent of the workforce. Around 32 percent of the total jobs are created in the manufacturing sector, 35 percent in trade, and 33 percent in other services. However, MSMEs are not only important for employment; they can also be an engine of growth. Budget has:

  • Proposed easing angel tax for
  • Angel tax: Won’t require scrutiny from the I-T department for a startup.
  • E-verification mechanism for establishing investor identity and source of funds for
  • 2% interest subvention for GST-registered MSME on fresh or incremental
  • Stand Up India’ Scheme to continue until

FDI:

  • Local sourcing norms will be relaxed for the single-brand retail
  • Government to open FDI in aviation, insurance, animation AVGC and

Agriculture:
Government to promote innovative zero Budget farming.

  • 10,000 new farm produce
  • 80 Livelihood business incubators and 20 technology business incubators to be set up in 2019 – 20 under ASPIRE to develop 75,000 skilled entrepreneurs in agro-rural industries

Banking reform

  • In order to become a 5 trillion economy, the Government needs funds, for investments. An efficient credit system is required but the NBFC crisis shook the market.  Hence the Government needs to bring out reforms to strengthen the financial system.
  • On purchase of high-rated pooled assets of NBFC amounting of Rs 1 lakh crore in this FY. The government will provide a one-time 6-month credit
  • Propose to provide Rs 70,000 crore capital for PSU Banks. PSBs to leverage technology, offering online personal loans and doorstep banking and enabling customers of one PSBs to access services across all PSBs
  • Regulation of HFCs (Housing Finance Cos) to move to RBI from National Housing

CHALLENGES ON THE WAY

  • Achieving such an aspirational growth target calls for pulling all the economic growth levers—investment, consumption, exports, and across all the three segments of agriculture, manufacturing, and services. To achieve the objective of becoming a USD 5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8
  • The first problem is the depressingly slow pace of infrastructure development in the last decade: the government estimates Rs 100 lakh crore infrastructure investments over the next five years or an average Rs 20 lakh crore a year. India does not have powerful institutions that can fund long-gestation infrastructure projects. Banks do not have enough long-term liabilities to match such loans. Lenders have gone terribly wrong in the past by not following healthy lending practices.
  • The government’s excessive involvement in businesses. The government remains a majority shareholder and an active participant in several entities including banks, airlines, and infrastructure firms. It controls 70 percent of the banking
  • The government will have to work out an exigency plan to get private investors back. This is even more critical now since domestic consumption is dropping to dangerous levels. Mint quoted a CMIE report that said investment in new projects plunged to a 15-year low in the quarter ending June 2019. Both private and public sectors announced new projects worth Rs 43,400 crore in June 2019 quarter, 81 percent lower than what was announced in the March quarter and 87 percent lower than during the same period a year ago. According to the finance ministry’s data, projects worth almost Rs 11 lakh crore remain ‘stalled’ or are having issues. Railways, roads, and power sectors account for more than half of these stalled projects.
  • The instability of global economies like a trade war between China and the USA will impact the exchange rate depreciating rupee will make it even more difficult for the economy to reach the 5 trillion figure.

MARKET TUNRS RED POST BUDGET

The stock market has logged its worst post-budget one-month performance since 2001.  NIFTY has declined by 7% since July 5th.  The fall in the market has been triggered by a bunch of budget proposals such as an increase in tax surcharge on FPI the introduction of 20% tax on share buyback and the move to increase free float by 10 % to 65 %. Though the surcharge was aimed at the upper rich, FPI with non-corporate structures has also been caught in the crosshairs.

The dream of doubling the size of the economy in five years is a laudable one. But it is imperative that the Modi government carry out bold reforms and work at breakneck speed to achieve it.

Ms. Manjit Kaur
MBA FA (2018 – 20)

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