Indian Economy is the eleventh largest in the world by nominal GDP and the third largest by purchasing power parity (PPP). India has shown a considerable growth rate over a number of years and at time India was the second fastest growing nation next only to China. India's had huge FDI inflow of Rs. 173,947 in 2011-12 and Rs. 88,520 in 2010-11 and a large number of investor opted India as their favourite destination. At times it was also estimated that India will take over China in coming years in terms of growth rate.
But with global economic crisis looming and Indian economy struggling due to policy paralysis and shortcoming of coalition government has pushed India to a sluggish growth rate. In the last quarter of previous fiscal year India showed the worst growth rate in decades. This along with increasing fiscal deficit, depreciating Rupee value, and uncontrolled inflation led the several rating agencies to lower the rating of India.
In such a scenario investor's started moving out of India and it was reflected in large amount of FDI outflow. Indian Government which is led by none other than the man who is credited with liberalisation reforms is in dilemma, and everybody is looking for a silver lining which can take India out of this downfall and put it back on the path of India Shining.
India is the world second most populated nation with wide variety of needs and vast problems, there can be no single policy or reform that can just change its growth trajectory. But there are several impeding reforms which can be implemented as soon as possible to boost investor's confidence.
Here we present some of the reforms which are in pipeline for a long time and when implemented will enhance the image of India as investing destination.
For any investor to invest he should be aware of tax policies of state so that he could plan his investments accordingly, India has fragmented tax structure and is currently working on tax reforms to meet global standards.
The Goods and Service Tax (GST) if properly and timely implemented can act as a silver lining of Indian Economy.
GST is goods and service tax which is levied at each point of Sale of goods or Providing of Service and Purchasing the goods or Procuring of Services. Tax will be charged with the consolidation of Central and state Government. GST is the replacement of Central and State level Taxes.
Dealers registered under GST will charge GST on the sale price of goods and services from their customers and claim credits for the GST includes in the price of their own purchase of goods and services used by them.
The GST is likely to improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.
It is expected to help build a transparent and corruption-free tax administration.
The other benefits of GST includes
It will reduce the bureaucracy in the state as their will be only authority for all procedure handling registration, assessments, audits and refunds.
The taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.
It will reduce the payment for aggregate number of state transaction to a single payment.
It will lower rate for all value added food products also the exemption for mass consumption items like bread, milk, salt etc.
It will broaden our tax base and increase our proximity to global tax system.
Also it is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax. It will divide the tax burden equitably between manufacturing and services.
The GST was introduced in 2007 by then Finance Minister and April 2010 was set as the day of its implementation but it is in midst of negotiation and delay and the GST has not yet seen the light of the day.
Growth of any economy is highly dependent on availability of finance to its public. Considering the fact that 70% of Indian resides in rural India and the penetration of banks in this sector is dismal major reforms are planned in this direction to improve the situation. Major financial reforms for financial inclusion are to be designed and implemented so that money availability and exposure will increase jobs, entrepreneurship that will trigger the growth of India economy and no wonder it will work as a silver lining.
Financial Inclusion is providing basic banking facilities at affordable cost and transparent manner to the vulnerable section of the society such as marginal farmers, oral lessees, self-employed and unorganized sector enterprises etc. By mainstream institutional players, this scheme also intends to cover laborers of National Rural Employment Guarantee scheme (NREGS).
The Financial Exclusion is staggering in India. Almost more than half the country is unbanked. Only 55% of the population have deposit account and only 9% have credit accounts with bank. India has the highest number of financial excluded households.
There is a huge potential for banking in rural as about 6 lakh villages in India, of which only 33495 have banks covered through Scheduled Commercial banks and 73% of the farming community do not have access to credit from Banks.
RBI's initiatives for Financial Expansion -
Liberalized KYC policy - up to Rs. 50000/- credit balance Accounts.
Introduction of "No Frill Accounts" or "Zero balance" Account.
Use of Business Correspondents / Business Facilitators channel.
Liberalized Branch Expansion
Benefits for the Banks -
Govt. of India is planning to use, Electronic benefit transfer, through which it would transfer the subsidiaries and labor payments (NREGS) directly to their accounts. This would give banks a large float and make it an attractive business proposition.
We have attractive demographic profile. As the economy grows and job opportunities grows for them and these people start savings, which would in turn increase the deposits for the banks.
Thousands of crores of remittances take place across India by migrant population through non formal channels. If the banks can tap this portion of the remittances, they would benefit from this additional free float.
They can further do cross selling of Insurance, Group Insurance or small savings schemes.
It is observed that economic growth follow Financial Inclusion. Financial Inclusion would extend banking facilities and credit to millions of the micro - entrepreneur across the country. Financial Inclusion would help uplift the less privileged section of the society and reduce the Gini coefficient.
India is sitting on a pile of fiscal deficit and rising expenditure and lower tax collections had forced the government to revise its fiscal deficit target to 5.9% of GDP in the fiscal year, as against the budget estimate of 4.6%. The government wants to limit its fiscal deficit to 5.1% of GDP in 2012-13 by controlling its subsidy bill to under 2% of GDP. But the depreciated Rupee can act as a silver lining in such a scenario as perhaps the exporters are the biggest beneficiaries of the depreciated Rupee, as now they will earn more in terms of Indian Rupee for the same quantities of sale. This is the situation where India has an opportunity to increase and capture market share by reducing the price of products and still making the same amount of profit in terms of Rupee.
Also with depreciating rupee holidays in India has become cheaper as foreigner has to shell fewer dollars. This is boom time for the tourism industry and an opportunity to capture the market share.
Every dark cloud has a silver lining. Hence the slowing down of the Indian economy comes with a positive growth prospects. The dependence of external forces to revive the economy is a rare possibility because the major economies of the world are struggling to achieve a stable growth. Indian economy is at crossroads at which to maintain a high growth rate , it has to take certain decisions and implement policies so the reforms has sort of become imperative for India and is a silver lining for Indian economy.
Sources:
http://www.rbi.org.in/
http://gstindia.com/index.php
http://insight.banyanfa.com/rupee-depreciation/
http://www.thehindu.com/business/Economy/
http://timesofindia.indiatimes.com/business/india-business/
http://www.economist.com/blogs/banyan/2012/08/financial-reform-india-0
http://business.rediff.com/slide-show/2009/jul/09/slide-show-1-all-about-gst.htm
http://dipp.nic.in/English/Publications/FDI_Statistics/2012/
