ECONOMY
START-UPS MAY SOON BE ABLE TO ACCESS INSURANCE, PENSION FUNDS
· The Centre will soon hold discussions with insurance and pension regulators on a proposal to enable pension funds, and insurance companies such as LIC to invest in start-ups.
· the Department of Industrial Policy and Promotion (DIPP), the nodal government agency on the start-up policy has supported the move
E-Pharmacy regulation:
· On other issues, Mr. Abhishek said DIPP was also in talks with the Health Ministry on issuing a clarification under the Drugs and Cosmetics Act to boost the e-pharmacy business.
· Ms. Sitharaman said the e-pharmacy players had met her recently in this regard.
Not for profit Startups and FCRA
· Another issue that came up for discussion was the hardships that some ‘not-for-profit’/’non-profit’ start-ups/incubators in the ‘social impact’ segment are facing in obtaining and utilizing funds from foreign sources.
· They have sought clarity on norms under the Foreign Contribution (Regulation) Act (FCRA) and the Income Tax Act.
· Currently, as per the FCRA, they have to explain that the funds received from foreign sources and the incomes earned from businesses are not linked to ‘speculative activities’ (including those related to investments in stock markets).
· Other issues discussed included the need for review of ‘archaic’ laws such as the Indian Societies Registration Act of 1860 to ensure they are either updated or done away with so that they do not hinder the start-up ecosystem.
· To ensure greater engagement between the financiers, mentors, start-ups and regulators, there will also be a meeting soon between SIDBI, the DIPP, leading venture capital funds, incubators and accelerators, Ms. Sitharaman said.
· On a query about establishing a H2,000-crore credit guarantee fund for entrepreneurs
WON’T EXTEND EXPIRY DATE OF INVESTMENT PACTS
· India will not extend the expiry date of Bilateral Investment Treaties (BIT) — providing legal protection to investments — that it has signed with as many as 83 countries when these pacts will come to an end by April 1, 2017
· This could lead to a situation where investments — from those nations that have not inked by April 1, 2017, a new investment protection pact with India on the basis of the Union Cabinet-approved revised text for BIT — may not be accorded complete legal protection, she said.
· Taking such a scenario into account, India had written to all these countries about a year ago to start or expedite talks on a new BIT on the basis of the revised BIT text.
· The development comes in the context of the European Commission (EC) recently taking up this issue with Indian government officials.
· The EC had pointed out that India’s separate BITs with 23 European Union (EU) member nations will soon expire one after the other and that the lack of a BIT will hit Foreign Direct Investment flows from EU to India.
· This is because the absence of a BIT adds to the risk premium and hikes the cost of funds for investors, in turn resulting in European firms deciding to make lesser investments in India than earlier planned, the EC had said. Therefore, the EC had demanded extension of the expiry date of these BITs till an India-EU BIT is signed and becomes effective.
WORLD BANK CUTS GROWTH FORECAST TO 7%
· The World Bank has lowered its growth forecast for India to 7 per cent from 7.6 per cent in 2016-17, citing a slowdown in consumption and manufacturing due to demonetization and an ongoing decline in private investment and credit constraints due to impaired bank balance sheets.
· The World Bank’s Global Economic Prospects January 2017 report added that the Indian economy is subsequently set to recover its growth momentum, with growth rising to 7.6 per cent in FY18 and further strengthening to 7.8 per cent in FY20.
· Unexpected ‘demonetization’—weighed on growth in the third quarter of FY2017.
· Weak industrial production and manufacturing and services purchasing managers’ indexes (PMI), further suggest a setback to activity in the fourth quarter of FY2017.
· A retrenchment of private investment, reflecting excess capacity, corporate deleveraging, and credit constraints due to impaired commercial banks’ balance sheets, also had an adverse effect on activity
· The report, however, noted that four key reforms in India in 2016 could help growth rebound.
o The passage of the bankruptcy and insolvency code,
o The liberalization of FDI norms across sectors,
o The passage of the Goods and Services Tax (GST) Amendment Bill, and
o The agreement between the government and the Reserve Bank of India on a monetary policy framework that includes setting up a monetary policy committee and agreeing on a flexible inflation target.
· Infrastructure spending should improve the business climate and attract investment in the near-term. The ‘Make in India’ campaign may support India’s manufacturing sector, backed by domestic demand and further regulatory reforms.
· “Moderate inflation and a civil service pay hike should support real incomes and consumption, assisted by bumper harvests after favorable monsoon rains.
· A benefit of ‘demonetization’ in the medium term may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity.
· Demonetization could still cause major problems in the short term, slowing reforms and affecting smaller economies dependant on the Indian economy, according to the World Bank.
In the short-term, ‘demonetization’ could continue to disrupt business and household economic activities, weighing on growth
· The report added that the demonetization effect on trade and remittance channels could also affect growth rates in smaller economies such as Nepal and Bhutan.
CUT BORROWING: RBI'S PATEL EXHORTS CENTRE
· Urjit Patel’s emphasis on the vital importance of protecting domestic macroeconomic stability could not have come at a more crucial juncture.
· Dr. Patel has stressed the need to ensure that it does not stray from the path of fiscal consolidation, at a time when the external environment is already adverse and likely to remain uncertain for the foreseeable future.
· That the clamour for a sizeable fiscal stimulus is likely to grow louder as budget day nears is a certainty, given the signs that an incipient demand slowdown may have been exacerbated by the cash crunch caused by the withdrawal of high-value banknotes.
· Borrowing even more and pre-empting resources from future generations cannot be a short cut to achieving durable long-term “higher growth” is significant.
· The general government deficit is among the highest in the G-20 economies
· High levels of government borrowing tend to crowd out private investment and paper over the urgent need for more abiding reforms.
· Specifically, the RBI chief has suggested that government expenditure be ideally reoriented towards creating more public infrastructure such as expanded railway networks and urban mass transit systems that would help boost productivity even as it leads to reductions in the oil import bill and provides the collateral benefit of improved air quality.
· And in what could be seen as an expression of assertion of the RBI’s independence of thought, Dr. Patel spoke of the risks that policy interventions in the form of government guarantees and interest rate subventions pose.
Credit Guarantees
· Large credit guaranteesalso impede optimal allocation of financial resources and increase moral hazard: MUDRA
· Such guarantees only add to the government’s liabilities and raise the risk premium on its borrowing solution
· Guarantees increase government’s contingent liabilities, and add to risk premia for its own borrowing. Guarantees per se, at the end of the day, have limited utility in solving important sector issues
· Cut down on borrowing and spend on public infrastructure to improve productivity.
· In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade
· Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front.
· Investment in public transport, specifically railways and urban MRTS can lead to reduced costs and productivity gains also help us to lower our oil import bill, and also improve air quality in our cities
· The government had maintained the fiscal roadmap in the last budget by proposing to keep fiscal deficit target at 3.5 per cent for 2016-17. The deficit target was to be lowered to 3 per cent by 2017-18.
· Interest rate subventions impeded optimal allocation of financial resources and increased moral hazards.
· Low and stable inflation was an essential prerequisite to a meaningful interest rate regime in which decisions by savers and investors help achieve maximal allocative efficiency in an economy whose investment rate has to increase for better growth outcomes.
· Smooth transmission of monetary policy also enhances the formulaic linkage between changes in policy rates and other rates, including administered ones
o Banks had been reluctant to cut interest rates despite policy rate reduction by RBI but from January 1 this year, they have implemented steep interest rate cuts, after the demonetization exercise reduced their cost of the funds significantly.
WE EXPECT BUDGET TO BOOST EMPLOYMENT
· The Union Budget 2017-18 is being announced at a time when the economy is seeing a growth rate exceeding 7% during this fiscal. At the same time, inflation is down and the current account deficit is under control. Our monsoons have been good.
· As a result, food-grain production is estimated to rise to an all-time high of 135 millon tonnes in the kharif season. Sowing is also robust in the rabi season which in turn is expected to stimulate the rural economy and improve purchasing power.
· The political consensus to usher in the GST augers well for future growth and inclusion. While demonetization is expected to inhibit the GDP growth rate, this is likely to be a blip in the growth trajectory for a quarter or two as the underlying fundamentals are largely positive.
Jobless growth
· Despite the above, our economy has been facing challenges on the employment front with job opportunities not commensurate with the rate of growth.
o Every year, 10 -12 million young people join the labour force and 5 million people leave agriculture to join the non-agriculture sectors. Thus, there exists a total demand of 15- 17 million new jobs per annum.
· Therefore there is an urgent need to improve employment intensity in the economy.
· Employment growth could be given a boost through investments in manufacturing and infrastructure.
o In the infrastructure space, capital expenditure in key projects like roads, railways, power as well as agri-infrastructure like irrigation, cold storage, warehousing and public housing projects in clusters would kick-start a virtuous cycle of employment-intensive growth.
· There needs to be an increase in public expenditure to boost employment
· Renewed attention to manufacturing and the ‘Make-in-India’ initiatives could be a major driver of growth and job-creation. The government has been in favour of setting up manufacturing zones as well as sector- and product-specific clusters.
· We look forward to the Budget to announce a few clusters especially in areas which generate employment.
Focus on MSMEs
· Within manufacturing, the major employers are the MSMEs
o Start-Up India and Stand Up India are some ways to enhance the competitiveness of new firms in the MSME domain, which in turn would create entrepreneurship and jobs.
o Encouraging creation of start-ups by removing the burden of State regulation and thereby reducing compliance costs and the tax burden of successful start-ups.
o A start-up could be defined as any firm less than 5 years old with no further qualification.
· For providing quality jobs in existing firms, the Government should extend the policy framework provided for textile and apparels to all sectors.
· This provides for fixed-term employment contracts to workers and state support for employers’ provident fund contributions in the first year.
· Specific reform policies for the top ten job-creating sectors such as tourism, IT, healthcare, textiles, and food processing, among others.
Innovation fund
· For promoting MSME innovation, a National Innovation Fund could be created with a sizeable corpus of at least ?10,000 crore to provide seed-funding to industry for innovation and R&D projects.
· There is also a need for a National Technology strategy for the next 10 years with clear outcomes in critical sectors such as Defence, Aerospace, Electronics, and Capital Goods. Such a strategic approach exists in Taiwan and South Korea.
· Tax deduction is available for employment generation under section 80JJAA of the Income Tax Act in respect of costs incurred on any employee whose total emolument is less than or equal to ?25,000 per month. This cap on salary is very low especially in the case of the software industry and should be suitably enhanced, at least to ?50,000.
· Tax deductions for investments in skill development, including provision of opportunities for training in specific skills, would encourage firms to hire workers rather than go for capital-intensive technologies. Skill training can be provided under a PPP framework and the government could consider a weighted deduction of 150% on skill development initiatives of the private sector.
· To provide a boost to skill development under the ‘Skill India’ initiative, a portion of MGNREGA expenditure could be linked to skill development initiatives for those workers who are interested in undergoing a training course.
