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Budget 2021 needs to attract foreign investment. Here's how.

More than corporate tax cuts, India needs greater ease of doing business

fdi_image Representative image

After a year like no other, all eyes are on Nirmala Sitharaman, hoping her budget on Monday will be as she described it, one “like never before". There is no doubt on what everyone’s expectations are—bring growth back by getting capital flowing. But how?

While many feel, rightly so, that the union government itself should loosen its purse string and embark on a massive spending spree, a la Roosevelt’s New Deal in the US after the great depression, the truth is that its arms are tied. With earnings from taxes and other modes of revenue dropping, there is a limit to how much the centre can spend without breaking newer limits of fiscal deficit. Not that it has tried—a total of nearly 30 lakh crore rupees (or 15% of GDP) was allocated through a series of ‘Atmanirbhar Bharat’ stimulus measures since May, according to govt claims.

Going forward, the way out is simple, yet challenging—attract foreign investment. Right from 2019’s corporate tax cut to performance-linked-incentives (PLI) to the likes of mobile phone makers and the Atmanirbhar Bharat Abhiyan have devolved down to this one simple mercantile tactic—luring business to set up shop in India, be it those looking for an alternative to China or those attracted by the huge domestic potential. What can this budget additionally do?

“Attracting FDI requires a two-pronged approach; first, restrictions specific to the sector in which FDI is desired to be attracted is relaxed, which includes increasing FDI limit, reducing compliance, setting up industrial parks and providing incentives for exports. One the other hand, the macroeconomic position should be improved to project a strong and stable economy for the investors and boost domestic consumption for the products,” feels Divakar Vijayasaraathy, founder and managing partner, DVS Advisors.

A dramatic easing of FDI limits is on the anvil, many feel. Yet, higher FDI limits and lower taxes may not be enough. Vikram Gupta, founder and managing partner of IvyCap Ventures Advisors, a VC fund manager, feels more measures like “special rights with respect to taxes, pricing mechanisms, fundraising options in India, partnerships, and recruitment” would be the way forward. 

Ironically, despite India slashing its corporate tax rates to some of the lowest in Asia, more FDI has gone, especially those leaving China or looking for a ‘plus one’ alternative, to countries like Vietnam and Thailand. 

Their advantage? Ease of doing business, where businesses coming in have to face very little red tape (single-window clearance in many cases) and already have logistics ranging from land, raw material, transport and port infrastructure is already in place for ready use. 

Arindam Guha, who leads the Government & Public Services practice for Deloitte in India explains. “Decisions are taken in a jiffy. There are no state, centre jurisdiction issues. Secondly, there are ‘plug-and-play facilities; where investors can locate very easily on a rental basis instead of capital investment.”

While the Indian government has been making efforts on these lines by setting up more and more sector-specific industrial parks and announcing PLIs, further, and dramatic, announcements in Budget 2021 could well be a game-changer.

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