March 3, 2015 Sujeev Shakya

Neighbour’s Plan

The budget in India is always seen as a litmus test for its government to provide key directions to the nation’s economic and development agendas. After decades, there is a government that is not a coalition and does not have to succumb to coalition pressure. However, many analysts in India were disappointed with the budget mainly because of high expectations from this government than perhaps other fundamentals. The current government is yet to secure a bold position in the Upper House of the Indian Parliament and, therefore, would not be able to push for reform agendas as people desire.

For Growth

India, especially after PM Indira Gandhi took over in the late 60s, pushed for distributive populist programmes. But billions of rupees marked for the poor fell on the wrong hands making the poor poorer. The Public Distribution System (PDS) was introduced which compromised  a citizens’ fundamental right: citizens were told what to eat by dictating what to buy, where to buy, how much to buy and at what prices to buy. Studies showed that more than $1,000 were lost per person each year in trying to ensure that basic food reached the poor and marginalised through the PDS. The people involved in the PDS network became rich while the poor grew poorer. The Indian government has now begun cash transfer schemes that hands people money and allows them to decide whether they want to have bread, bananas or broccoli. Nepal should take cue and take a relook at its distributive schemes especially those involving Liquefied Petroleum Gas and food grains sold through the National Food Corporation.

The budget does spell out the intention of India’s global pursuit in line with Indian Prime Minister Narendra Modi’s vision. Indian economist Swaminathan Aiyar in his analysis writes, “It’s a budget for growth and global competitiveness. By pledging to cut India’s corporate tax rate from 30 percent to 25 percent within four years, in line with Asean rates, Finance Minister Arun Jaitley signalled his intention to create Competitive India. This was a bigger conceptual breakthrough than his big thrust in infrastructure, aimed at kickstarting economic growth in the country.” It will be interesting to watch whether such commitments translate into real policy along with the right legal and institutional framework.

For Us

In Nepal, we are keener on knowing how much India is giving us this year as grants rather than its pronouncements to increase trade and investments. We are yet to get over our myopia of expecting grants and freebies. Two fundamental issues in the Indian budget, however, could perhaps offer Nepal some opportunities. The first is the expediting of the Integrated Custom Points. World over, we have seen that integrated border posts help the economies of both the countries involved. So we have to move to an era where we have 24 hour operational checkpoints that facilitate trade across the border. For too long, businesses have taken advantage of the borders not functioning 24 hours and hopefully, they will not stage demonstrations when the governments announce round-the-clock-services.

Second, the easing of visa policies for people of over 150 countries will add a new dimension to the tourism industry. Nepal is a destination that is sold along with India in many markets and many tourists coming to Nepal do not treat the country as a standalone destination. As we see more people coming from different countries to India we will surely see more tourists coming to Nepal as well.

For Investment

To attract foreign investment, India is looking at easing of tax on Mergers and Acquisition (M&A) especially policies concerning foreign entities. The case of the telecom giant Vodafone along with others had given a signal to the international investor community that India still is not ready to give up its tax issue. However, if the new provisions for tax on M&A are implemented, there would be more investment in India. Nepal should also learn from this and ensure that we send positive signals to the international investor community, as currently, the country is known to be holding on to even legitimate dividend repatriation by investors.

Secondly, the Indian budget looks at monetising and channeling the investment in gold to productive use. The gold monetisation scheme will allow the depositors of gold to earn interest in their metal accounts and for the jewellers to obtain loans in their metal account. They are exploring introduction of Sovereign Gold Bond, as an alternative to ‘purchasing metal gold’.In Nepal, a lot is locked in gold and we have to use such methods to leverage investments in gold for productive use.

Finally, it seems tax evasion will be taken up seriously as more stringent disclosures are being introduced by Indian authorities. For instance, evasion of tax in relation to foreign assets now will face imprisonment for up to 10 years, an increase in penalty rate by 300 percent, and the offender will not be permitted to approach the Settlement Commission. This also means a lot of black money may travel to Nepal. It will be  important for Nepal to ensure that asset prices will not inflate with such money entering Nepal.

The Indian budget seeks to redefine the way its government wants to facilitate economic growth and inclusive development. Hope the intent is followed by action.

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