India’s Finance Budget and slipping economic growth

The Union Finance Budget was announced without much in it for foreign investors. The economy remains a point of discussion with global financial institutions as recovery does not appear in the horizon. While India has not been directly hit by Coronavirus, it is feeling the effect in different sectors and somewhere in the overall economy as well.

Fitch Differs from Budget – Fitch Ratings recently said India is expected to clock a GDP growth of 5.6 per cent in the next financial year, lower than the projection made by the government’s Economic Survey, as Budget 2020 has not “materially altered” its view on the country’s growth outlook. “The fiscal slippage announced in the government’s new FY21 budget is modest relative to its previous targets, and is consistent with our expectations when we affirmed India’s ‘BBB-‘ rating with a stable outlook last December, given slowing growth momentum,” said Thomas Rookmaaker, Director and Primary Sovereign Analyst for India, Fitch Ratings. “The new budget targets imply some further postponement of fiscal consolidation, in line with the government’s ambivalent approach to consolidation of the past few years when deficit outturns have typically exceeded budget targets,” Fitch said projecting general government debt to remain close to 70 per cent of GDP through FY22. India’s high public debt relative to peers is a rating weakness, it said. “The budget does not materially alter our view on India’s economic growth outlook, which we forecast to pick up to 5.6 per cent in FY21 from 4.6 per cent in FY20,” it said

Moody’s Lowers growth forecast – Amidst indications of the deadly coronavirus hitting global growth, international rating agency Moody’s Investors Service recently lowered the estimate for India’s economic growth rate for 2020 by 120 basis points. In its February update titled ‘Global Macro Outlook 2020-21’, the agency said that India’s economic recovery will likely be shallow. It said that India’s economy has decelerated rapidly over the last two years. Real GDP grew at a meagre 4.5 per cent in the third quarter (October-December) of 2019-20. Improvements in the latest high-frequency indicators such as Purchasing Managers’ Index (PMI) data suggest that the economy may have stabilised. While the economy may well begin to recover in the current quarter, we expect any recovery to be slower than we had previously expected, Moody’s said. “Accordingly, we have revised our growth forecasts to 5.4 per cent for 2020 and 5.8 per cent for 2021, down from our previous projections of 6.6 per cent and 6.7 per cent, respectively,” it said.

Union Finance Budget Announced – In the Union Finance Budget, announced by the Union Finance Minister, Ms. Nirmala Sitharaman, the following proposals were made with respect to foreign investment:

  • In order to incentivise the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, it was proposed to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before March 31, 2024 and with a minimum lock-in period of 3 years.
  • It was proposed to extend the period up to June 30, 2023 for lower rate of withholding of 5% under section 194LD of the Income Tax Act, 1961 (‘IT Act’) for interest payment to Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) in respect of bonds issued by Indian companies and government securities.
  • Non-availability of credit of Dividend Distribution Tax (DDT) to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them. It was proposed to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.
  • In order to make available foreign funds at a lower cost, it was proposed to extend the period of concessional withholding rate of 5% under section 194LC of the IT Act for interest payment to non-residents in respect of moneys borrowed and bonds issued up to June 30, 2023.

FDI Increased in Insurance Intermediaries – The Department for Promotion of Industy and Internal Trade (DPIIT) has issued Press Note 1 of 2020 wherein the existing Foreign Direct Investment (FDI) Policy of 2017 relating to insurance sector was amended. The amendment increases the FDI cap under the automatic route for insurance intermediaries including insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrator, surveyors and loss assessors etc. to 100% from erstwhile cap of 49%.

FPIs from Mauritius can continue – Foreign portfolio investors (FPI) from Mauritius will continue to be eligible for FPI registration with increased monitoring as per Financial Action Task Force (FATF) norms, market regulator Securities and Exchange Board of India (SEBI) recently said. FATF is an inter-governmental policy-making body setting anti-money laundering standards. The market regulator said there has been uneasiness among market participants regarding whether the inclusion of Mauritius in the ‘grey list’ would have an effect on the registration of FPIs from Mauritius.  ‘Grey List’ is meant to list each such jurisdiction that has committed to resolve identified strategic deficiencies within agreed timeframes and is subject to increased monitoring.