BY CA SUNIL H. TALATI M.COM., L.L.B., FCA., PAST PRESIDENT OF ICAI.

Global Impact of Indian Budget 2015-16

BY CA SUNIL H. TALATIM.COM., L.L.B., FCA.,

PAST PRESIDENT OF ICAI

PRIVATE & CONFIDENITAL2

Highlights of the Economic Survey of India-2014-15

2015-16 GDP growth seen at over 8% year on to year basis.

Double digit economic growth trajectory now a possibility.

Govt remains committed to fiscal consolidation.

Inflation shows declining trend in 2014-15.

Overhauling of subsidy regime would pave the way for expenditure rationalization.

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Economic Outlook, Prospects, and Policy Challenges

A political mandate for reform and a benign external

environment have created a historic moment of

opportunity to propel India onto a double-digit

growth trajectory. Decisive shifts in policies

controlled by the Centre combined with a persistent,

encompassing, and creative instrumentalism in

other areas could cumulate to Big Bang reforms.PRIVATE & CONFIDENITAL


Macro-economic management and policy reforms

Reforms have been initiated in a number of

areas and major ones are on the horizon. The

macroeconomic response to the favourable

terms of trade shock has led to an

appropriately prudent mix of increased

government savings and private consumption.

PRIVATE & CONFIDENITAL.

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OUTLOOK FOR GROWTH

In the short run, growth will receive a boost from lower

oil prices, from likely monetary policy easing facilitated

by lower inflation and lower inflationary expectations,

and forecasts of a normal monsoon. Medium-term

prospects will be conditioned by the “balance sheet

syndrome with Indian characteristics,” which has the

potential to hold back rapid increases in private sector

investment.

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Trade Deficit

In 2013-14, India’s trade deficit (on customs basis) declined to US$ 135.8 billion from a

high level of US$ 190.3 billion in 2012-13, mainly on account of a decline in the growth

of imports (8.3 per cent), even though growth in exports was sluggish at 4.7 per cent.

The decline in imports owed to lower growth in oil imports (0.4 per cent) and negative

growth in gold and silver imports. However, in 2014-15 (AprilJanuary) trade deficit

increased marginally by 1.6 per cent to US$ 118.4 billion as against US$ 116.5 billion in

2013-14 (April-January). Low export growth (2.4 per cent) and import growth (2.2 per

cent), resulted in a modest increase in trade deficit by US$ 1.8 billion. Nevertheless in

terms of levels, trade deficit being close to last year reflects on external-sector polices

including trade policies.

PRIVATE & CONFIDENITAL


GLOBAL ECONOMIC ENVIRONMENT

In the case of emerging market and developing economies (EMDEs), which continue to struggle

with tepid domestic demand and headwinds from structural impediments, the IMF Update

projects growth to moderate to 4.3 per cent in 2015 and 4.7 per cent in 2016. The IMF’s

projections only partially reflect the net impact of the fall in global crude oil prices and for the

near term outlook. Going forward, the lower oil price is likely to be more positive for the EMDEs

that account for more than half of the global output (purchasing power parity terms) given their

higher contribution to global growth with inflation remaining anchored. This might lead to a

better outcome than projected. A sudden correction in financial markets and downside risks to

growth with a possible further slowdown in the euro area along with the likely duration of the oil

price supply shock effect, are some of the concerns that linger on.


Services Sector

India’s dynamic services sector has grown rapidly in the last decade with

almost 72.4 per cent of the growth in India’s GDP in 2014-15 coming from

this sector. Unlike other developing economies, the Indian growth story

has been led by services-sector growth which is now in double digits.

Services in India are emerging as a prominent sector in terms of

contribution to national and states’ incomes, trade flows, FDI inflows,

and employment.


Foreign Direct Investment in World Services Sector

In 2014, global foreign direct investment (FDI) inflows declined by

8 per cent to an estimated US$ 1.3 trillion, due to the fragility of the

global economy, policy uncertainty, and geopolitical risks as per

the United Nations Conference on Trade and Development

(UNCTAD). China became the world’s largest recipient of FDI, with

an increase of 3 per cent driven by FDI in the services sector while

FDI in manufacturing fell.


Foreign Direct Investment in World Services Sector

Software development and information technology enabled services (ITeS) including business process

management (BPM), software engineering R & D services and product development has emerged as one of the

most dynamic and vibrant sectors in India’s economy.

The Research and Development (R&D) sector has been growing consistently in double digits in the last few years

with growth at 20.8 per cent in 2012-13 (old method). Professional, scientific and technical activities including R&D

grew by 14.0 per cent in 2013-14 (new method). According to Global R&D Service Providers (GSPR) Rating 2014, a

report by Zinnov Management Consulting, India’s R&D globalization and services market is set to double by 2020

to US$ 38 billion. The study estimates the overall addressable R&D globalization and services opportunity at US$

170 billion as of 2014. Currently only US$ 55 billion of this opportunity is addressed globally. India’s share of the

addressed market is 33 per cent with in-house R&D centers contributing US$ 11.3 billion worth of services to their

parent companies.


Real Estate and Housing

Real estate and ownership of dwelling constitute 7.8 per cent of India’s GDP in 2013-14. Both

domestic and global slowdown affected this sector with growth decelerating from 7.6 per cent

in 2012-13 to 6.0 per cent in 2013-14 and FDI in the real estate sector falling to US$ 703 million

in the period April-November 2014.

House prices have increased over the years in many cities and towns as per the National

Housing Bank’s RESIDEX index of residential prices in India. In 2014, out of 26 cities, 17

witnessed increase in prices over 2013 with the maximum increase observed in Chennai (17

per cent) followed by Ahmedabad (15 per cent ), while 7 saw decline, with the maximum fall

witnessed in Meerut (-16 per cent ) followed by Chandigarh (-8 per cent).


Real Estate and Housing (Cont.) Several policy initiatives taken in 2013-14 to help this sector include the amendment of the FDI policy,

thereby reducing the minimum floor area to 20,000 sq. m from the earlier 50,000 sq.m and bringing

down the minimum capital requirement to US$ 5 million from US$ 10 million. Budget 2014-15 also

announced setting up of Real Estate Investment Trusts (REITs) and SEBI has approved the REITs

regulation. In order to encourage savings, the deduction limit on housing loan interest for self-

occupied property was also increased to ` 2 lakh from the earlier ` 1.5 lakh in Budget 2014-15. In order

to push development of affordable housing and achieve the target of housing for all by 2022, the

Reserve Bank of India (RBI) relaxed norms for issue of long-term bonds by banks for financing

affordable housing.


Consultancy Services Consultancy services are emerging as one of the fastest growing services in India cutting across

different sectors with some overlapping. According to Plunkett Research, global consulting industry

revenues (including human resources [HR], IT, strategy, operations, management, and business advisory

services) increased to an estimated $431 billion in 2014 compared to US$ 415 billion during the previous

year. India’s outsourcing and consulting industry is estimated at US$ 86.4 billion in 2014, accounting for

almost 20 per cent of global consulting industry revenue, and is projected to reach US$ 99.0 billion in

2015.

India’s emergence as one of the fastest growing consultancy markets worldwide is largely attributable to

increased investment activities due to liberalization of FDI, entry of many new players into the Indian

market and low cost sourcing. Indian consultants have good expertise particularly in engineering

consultancy which could be leveraged to enhance consultancy exports


OUTLOOK AND CHALLENGES AHEAD

Consultancy services are emerging as one of the fastest growing services in India cutting across

different sectors with some overlapping. According to Plunkett Research, global consulting industry

revenues (including human resources [HR], IT, strategy, operations, management, and business advisory

services) increased to an estimated $431 billion in 2014 compared to US$ 415 billion during the previous

year. India’s outsourcing and consulting industry is estimated at US$ 86.4 billion in 2014, accounting for

almost 20 per cent of global consulting industry revenue, and is projected to reach US$ 99.0 billion in

2015.

India’s emergence as one of the fastest growing consultancy markets worldwide is largely attributable to

increased investment activities due to liberalization of FDI, entry of many new players into the Indian

market and low cost sourcing. Indian consultants have good expertise particularly in engineering

consultancy which could be leveraged to enhance consultancy exports

HIGHLIGHTS OF

INDIANBUDGET

AMENDMENTS

2015-16

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Fiscal deficit seen at 3.9 percent of GDP in 2015-16 to meet the challenging fiscal target of 4.1 percent of GDP.

Govt. to remain committed to meeting medium term fiscal deficit target of 3 percent of GDP.

Current account deficit below 1.3 percent of GDP

Hon’ble FM says have to keep fiscal discipline in mind despite need for higher investment.

FISCAL DEFICIT

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Fiscal deficit seen at 3.9 percent of GDP in 2015-16 to meet the challenging fiscal target of 4.1 percent of GDP.

Govt. to remain committed to meeting medium term fiscal deficit target of 3 percent of GDP.

Current account deficit below 1.3 percent of GDP Hon’ble FM says have to keep fiscal discipline in mind

despite need for higher investment.

FISCAL DEFICIT

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Expects consumer inflation to remain close to 5 percent by March, opening room for more monetary policy easing.

Monetary policy framework agreement with the RBI clearly states objective of keeping inflation below 6 percent.

"One of the achievements of my government has been to conquer inflation. This decline in my view represents a structural shift."

INFLATION

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Propose to merge commodities regulator with SEBI.

To bring a new bankruptcy code.

FM says will move to amend the RBI act this year, and provide for a monetary policy committee.

To set up public debt management agency.

MARKET REFORMS

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Proposes to introduce a public contract resolution of disputes bill.

To establish an autonomous bank board bureau to improve management of public sector banks

MARKET REFORMS

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To enact a comprehensive new law on black money.

Propose to create a universal social security system for all Indians.

To launch a national skills mission soon to enhance employability of rural youth.

To raise visa-on-arrival facility to 150 countries from 43.

Allocates 346.99 billion rupees for rural employment guarantee scheme.

Raises threshold for application of transfer pricing rules to 200 million rupees from current 50 million rupees

POLICY REFORMS

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Allocates 346.99 billion rupees for rural employment guarantee scheme.

Raises threshold for application of transfer pricing rules to 200 million rupees from current 50 million rupees.

POLICY REFORMS

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To abolish Wealth Tax.

Replaces wealth tax with additional 2 pct surcharge on super rich.

Proposes to cut to 25 percent Corporate Tax over next four years.

Royalty and FTS to be taxed at 10% instead of 25%.

TAXATION

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FM proposes modification of permanent establishment norms so that the mere presence of a fund manager in India would not constitute a permanent establishment of the offshore fund,

resulting in adverse tax consequences.

Expects to implement goods and services tax by April 2016.

To reduce custom duty on 22 items.

GAAR deferred by another 2 years.

TAXATION

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Basic custom duty on commercial vehicle doubled to 20 percent.

Proposes to increase service tax rate and education cess to 14 percent from 12.36 percent.

Plans to introduce direct tax regime that is internationally competitive on rates without exemptions.

.

TAXATION

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Exemptions for individual tax payers to continue.

To enact tough penalties for tax evasion in new Bill.

Tax dept to clarify indirect transfer of assets and dividend paid by foreign firms.

TAXATION

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"We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then.“

"We have turned around the economy, dramatically restoring macroeconomic stability and creating the conditions for sustainable poverty elimination, job creation, durable double digit economic growth."

FINANCE MINISTER'S COMMENTS

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"While being mindful of the challenges ... this gives us reason to feel optimistic.“

"Domestic and international investors are seeing us with renewed interest and hope."

FINANCE MINISTER'S COMMENTS

Any Questions?

BY CA SUNIL H. TALATI M.COM., L.L.B., FCA., PAST PRESIDENT OF ICAI.

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Transcript of BY CA SUNIL H. TALATI M.COM., L.L.B., FCA., PAST PRESIDENT OF ICAI.