By FPJ Bureau
Financial
systems in a country play the role of an anchor in the overall development and
any problems in their stability will have a bearing on the overall performance
of an economy.
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Global economic scenario today
determines the economic strategies to be adopted by countries. The scenario is
so unpredictable and gloomy, countries should focus on economic growth and job
creation to maintain balance in the economy and ensure the stability of the
economic and financial systems. India has the potential to grow at 8% and all
action plans to be adopted by the government could be derived from setting it
as the objective.
Financial systems in a country play the
role of an anchor in the overall development and any problems in their
stability will have a bearing on the overall performance of an economy. The developments
in the financial services sector in the last few months was a setback to the
Indian economy and the economic growth.
The budget by the Central government is
addressing the needs of accelerating the economic growth and bringing back the
stability and vibrancy to the financial services industry, which will help to
kick-start the process of balanced economic growth. Increasing the liquidity in
the economy across the sectors will also help the cause.
The Government has proposed a number of
reforms with a strong focus on investment in infrastructure development,
digital economy and employment generation in medium and small enterprises by
stimulating growth, promoting digitisation, transparency and simplifying tax
administration.
The projection for growth of tax
collections and the target for growth is one of the highest in the recent
times. There is a need to mobilise resources from new non-conventional sources
of funding.
The proposal to examine suggestions on
opening foreign direct investment (FDI) in several sectors, including aviation,
media, animation and insurance sectors will go a long way in bringing long-term
funds to the Indian economy from other parts of the world.
There is a Proposal to merge
NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment
(FPI) Route to provide NRIs with seamless access to Indian equities.
This is a great proposal and by
bringing in policies for effective implementation of this scheme, we should be
able to keep the interest of FPIs and NRIs in the Indian market and action
plans have to be identified for tapping the funds from these sources.
In the railways sector, the proposal is
to focus on Public-Private Partnership (PPP) for faster development and
completion of tracks, rolling stock manufacturing and delivery of passenger
freight service. Indian Railways is one of the largest land owners in India.
Large part of the funds required for
development of railways can come from capitalisation of the land bank as well
as investment from private partners.
The proposal that Securities and
Exchange Board of India (SEBI) will consider increasing the minimum public
shareholding in the listed companies from 25% to 35% will force existing
companies that are doing well to go to the market for dilution and take away
funds required by enterprises which need the funds most. This proposal could be
reviewed. As and when the financial system and economic system stabilise, this
proposal could be introduced.
Few of the proposals in the budget also
resulted in investors turning positive towards investment in debt and negative
in investing in equity. A survey could be done on investor sentiments and
required amendments could be made in the proposals so that their sentiment in
stocks and stock markets come back to normal levels. When we are planning to
increase the level of financial intermediation, there is a need to make
investments in financial instruments attractive.
To continue the policy of disinvestment
in non-financial public sector undertakings and consider holding less than 51%
stake in such undertakings on a case-to-case basis is a brilliant proposal.
Most of the PSUs hold valuable property. Companies like MTNL have assets which
are highly valuable compared to the debt they have.
Before such dilution, the scope for capitalising
the assets through REIT/InviT Structure could be looked at apart from sale of
some of the prime properties in the large cities.
In many cases, capitalising the prime
property will make sick companies very healthy. The Government plans to invest
INR 100 trillion on infrastructure in the next five years.
An expert committee is to be set up to
study the current situation relating to long-term finance and India’s past
experience with Development Finance Institutions (DFIs), and recommend the
structure and required flow of funds through DFIs.
Another promising proposal is to launch
a scheme to invite global companies to set up mega-manufacturing plants in
advanced technology and provide them investment linked income tax exemptions
under section 35AD of the Income Tax Act, 1961, and other indirect tax
benefits.
In the last few years, the capital
investment in the economy witnessed a sharp decline and especially in the
private sector, there was very less capital investment. In the last few months,
the capacity utilisation has come down below 70% after crossing 75% a few
months back.
This was also partly due to consumer
expenditure declining in sectors like auto and housing, which were mainly
relying on external funds. The banking credit flow to many sectors are also affected.
There is a need to boost the consumer
sentiment which will help to shore up the demand for many products. This will
help to increase the capex in several sectors.
The policies proposed in the budget
will go a long way in boosting the sentiment of investors, consumers and
corporates. To realise the full potential, effective implementation, continuous
monitoring of the impact of implementing the policies and bringing fast course
corrective actions during implementation will go a long way achieving the
objectives set by the government.
R Kannan is Head, Corporate Performance
Management, Hinduja Group. The views are personal.
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