On 29 February 2016, the Modi government presented its third budget. While the global economy and financial markets are experiencing an uncertain and volatile period, India, as the world’s fastest growing large economy offers significant promise and opportunity.

In the last fiscal year, India’s growth story has continued and GDP growth accelerated to 7.6% and CPI inflation has been reduced to 5.4% (from the double digit inflation seen in recent years).

Importantly, the government has also stuck to the path of fiscal consolidation, by narrowing the fiscal deficit target for the upcoming year to 3.5% of GDP, paving the way for further rate cuts to be delivered by the Reserve Bank of India.

The key themes from last year’s budget (click here for our 2015 Indian budget summary), have continued and this year’s budget is promoted as one to ‘Transform India’ and the lives of its people.

The budget aims to address the challenges and problems that are currently facing the Indian economy, particularly in the agriculture sector and rural economy, which is struggling from back to back droughts.

The 9 broad themes that the budget focuses on are: agriculture and farmer’s welfare, rural sector reforms, social sector reforms, education, skill and job creation, infrastructure and investment, financial sector reforms, governance and ease of doing business, fiscal discipline and tax reforms.

Below are some of the key highlights of the budget which may be of interest to foreign investors.

Infrastructure

In an effort to create strong sustainable economic growth and to connect the rural economy to the major cities, the government announced a wide range of initiatives to boost infrastructure and investment in the country, with a particular emphasis on roads and highways.

The total amount allocated to infrastructure spending was 2.21 trillion rupees (circa. AUD $43.5 billion), an increase of circa 22.5% in comparison to last year. Some of the infrastructure allocations are outlined below:

  • (roads and highways) – the creation of new roads and 10,000 kilometres of national highways, and the upgrading of approximately 50,000 kilometres of state highways into national highways;
  • (ports) – the development of greenfield ports on both the eastern and western coasts of India, which will assist the government in encouraging companies to manufacture in India. The existing ports will also be modernised to help improve efficiencies;
  • (airports) – the revival of 160 non-functional airports and the development of 10 non-functional air strips. These measures are intended to boost regional connectivity in the country.

Australian companies with significant knowledge and experience in these areas can be expected to start looking at opportunities to export their expertise, knowledge and capital (where permitted) into these sectors.

Foreign Investment

To boost foreign investment, the budget proposes further liberalisation of foreign direct investment (FDI) in a number of sectors. Foreign investment is needed because Indian banks are struggling under a mountain of bad debts and are unable to fuel the growth which India requires.

Since coming into government, Modi has been liberalising the foreign direct investment thresholds in many sectors including defence, private banking and broadcasting. Foreign direct investment during April to December 2015 was up 40% year on year to circa AUD$39 billion.

Some of the key changes in FDI are outlined in the table below.

Click here to view the table

Ease of doing business

The Indian government has recognised that the historically slow and drawn out nature of disputes in India is affecting the level of foreign investment in the country. The government has attempted to reduce these concerns as outlined below.

Code on Resolution of Financial Firms

Last year, the government recognised that a comprehensive overhaul of the corporate insolvency laws was required to improve the ease of doing business and also to reduce the risks associated with doing business in India.

Whilst the proposed insolvency law amendments are still pending before parliament, the government outlined in the budget that a Code on Resolution of Financial Firms will be introduced to parliament this fiscal year. This code is intended to provide a resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. The code is also expected to provide a major boost to the development of the corporate bond market in India.

A Public Utility (Resolution of Disputes) Bill

To incentivise and boost private sector investment in infrastructure, the government has outlined that A Public Utility (Resolution of Disputes) bill will be introduced to parliament during this fiscal year to streamline institutional arrangements for the resolution of disputes in infrastructure related construction contracts, public-private partnerships and public utility contracts.

Dispute Resolution Scheme

In order to create a stable and transparent tax regime and reduce the backlog of pending appeal cases before the courts, the government outlined a Dispute Resolution Scheme (DRS) would be established. Under the DRS, a taxpayer who has an appeal pending before an appellate court in respect of retrospective amendments to the income tax laws, can (in certain circumstances) settle the case by paying the disputed tax and interest up to the date of assessment.

No penalty in respect of income tax cases with disputed tax up to 10 lakh (circa. AUD $20,000) will be levied, but cases with disputed tax exceeding 10 lakh (approx. AUD $20,000) will only be subjected to 25% of the minimum of the imposable penalty for both direct and indirect taxes.

Whether the DRS will be taken up by taxpayers will remain to be seen and taxpayers whom are currently in disputes are expected to weigh up their options in considering whether to avail themselves of the DRS.

Amendments to the Companies Act

The budget includes proposals to amend the Companies Act 2013 to (amongst other things) enable the registration of companies in one day and also to address some of the challenges affecting start-up companies.

Residency

Subject to certain conditions, foreign investors will now be afforded residency status.

Australia - India Comprehensive Economic Cooperation Agreement

In recent years, there has been a renewed interest in India as an investment opportunity for Australian businesses. The budget illustrates that the Indian government continues to take some encouraging steps to make the business environment more attractive and conducive to foreign investment.

It is expected that opportunities in trade between Australia and India are expected to flourish in 2016 as the Australia-India Comprehensive Economic Cooperation Agreement (AICECA) is due to be signed this year. AICECA will create significant opportunities for Australian companies wanting to grow and diversify their operations into India. Australian companies with significant ‘know how’ and expertise in key areas of demand as outlined in this article, will be looking to export some of their ‘knowledge intensive services’. The signing of AICECA will mark a new phase in trade relationships between the two nations as India will be in a position to become a major trading partner of Australia.

Conclusion

Global investors will be following the passage of the budget through parliament with significant interest. Given India is a democracy and Modi does not control both houses of parliament, important reform can take a considerable amount of time. For example, the ‘big bang’ reform proposed last year, the GST, has yet to be enacted. Similarly, other crucial bills, including the proposed amendments to the anti-bribery and corruption laws and insolvency laws are also being held up in parliament.

Despite these political delays to implement key reform, there remains significant opportunities in India. Foreign companies considering investments into India need to carefully consider the political and economic climate in the country as well as the specific business climates in the individual states and cities which they will target as the appropriate entry point for their business. Similarly, foreign companies need to invest time in understanding the Indian culture and the importance of building relationships with key government agencies, customers and suppliers to ensure they are ready to take advantage of all the opportunities that the growing nation can provide.