The COVID-19 pandemic has disrupted the global economy and India is no different.
The significant reduction in domestic demand caused by the nationwide lockdown has pushed the economy towards contraction in the first quarter of 2020-21, and the impact is likely to be felt in subsequent months as well.
In this regard, PM Shri Narendra Modi has taken decisive and commendable action to mitigate the impact of the virus outbreak, from both a health and an economic perspective.
Coronavirus stimulus package totalling ₹20 lakh crore:
The inability of nations to control the spread of the novel coronavirus and the lack of a confirmed cure for the disease have exacerbated people’s concerns.
Such a heightened sense of anxiety among people can cause tremendous upheavals in the functioning of societies.
Consequently, disruption of the normal social order will inevitably impact livelihoods and the larger economy.
On May 12, 2020, Hon. Prime Minister Narendra Modi unveiled a mammoth coronavirus stimulus package totalling ₹20 lakh crore, which works out to about 10% of GDP, making it one of the most substantial relief plans in the world.
The revised stimulus package can help revive businesses, which are finding it difficult to operate without adequate availability of credit.
This is especially true for India’s 60,000-odd start-ups which are facing an acute liquidity crunch. The situation presents an opportunity to take bold action to promote investments, protect existing jobs and create new jobs.
The strategy should address four major economic cylinders:
- a) Big Business Houses which are a major contributor to GDP and large employment generators.
- b) MSMEs which are the lifeline of the country, generating wealth for the middle class.
- c) Start-ups which bring innovation and transformation to our country’s economy.
- d) Our Indian Brothers and Sisters living abroad, the NRIs and OCIs — they not only serve as unofficial ambassadors of India, but their heart beats for India and through their contacts, can bring huge investments into India.
Big Business Houses:
- Big business houses should be supported by the government to reopen their operations by way of tax incentives or ease of procurement of raw materials or other goods and services on credit as this will energise consumer demand and boost the functioning of vendor or ancillary industry in the MSME sector (which has huge potential for job creation).
- The RBI should consider Single One Time Window for restructuring business loans, as required, by all banks.
There is a high probability that non-performing assets are likely to rise once the prevailing moratorium is lifted by RBI. The government and RBI also urgently need to assure banks, that their business decisions will not be questioned, to encourage credit flows.
- The Centre can prepare a five-year plan on getting at least 60 per cent of those companies, desiring to move manufacturing out of China to India.
- Making India a global trading hub – devise an incentive regime for companies setting up global trading operations from India.
- The States should think of establishing self-contained “industrial cities” that earmark space for manufacturing, commercial, educational, residential and social infrastructure.
- The 10 sectors identified by the government fit into the Make in India campaign — electrical, pharmaceuticals, medical devices, automotive, mining, electronics, heavy engineering, renewable energy, food processing, chemicals and textiles. Japan, the U.S. and South Korea have already shown interest.
- It should also encourage sunrise sectors as part of re-imagining Indian economy such as battery manufacturing (storage systems)/ solar panel manufacturing.
The government can also consider giving impetus to “Deep Tech”-leveraged businesses — blockchain, robotics, AI, machine learning, augmented reality, big data analytics, cyber security, etc.
- India is amongst the top start-up ecosystems globally. Several of them are in pre-Angel or Angel-Funding stages and are under significant pressure to stay afloat in view of a lack of adequate liquidity.
Start-ups not only help drive innovation, but also create jobs, which will be very important going forward. The government needs to provide significant support to the start-up ecosystem.
- The auto industry which contributes significantly to GDP (nearly 9%) deserves special treatment.
In addition to reducing GST rate, old vehicle scrap policy with tax incentives for creating a demand for new vehicles may be formulated. There is need to recognise Auto Sales Industry channel partners as MSMEs
- Plug-and-Play model: Maharashtra has created a turnkey ‘plug-and-play’ model for foreign investors. Similarly, other States must get their act together, be it on land acquisition, labour laws and providing social, environment and other infrastructure. Land should be made available for projects with all necessary pre-clearances — at Centre’s level (including Environmental), State’s and Municipal dispensations.
- Reforms in labour laws do not only mean permission to hire and fire. Leeway should be given to strictly enforce discipline within the factory premises and demand higher productivity.
The moves by U.P., M.P. and Gujarat are welcome signals. The government should provide health insurance for migrant labourers as experimented by certain States.
To bring huge investments into India:
- Investments of NRIs and OCIs in India should be treated on par with those of Resident Indians as regards interest and dividend repatriation and management control of Indian companies.
It may be mentioned that the Chinese government had called on rich overseas Chinese to invest in China with minimum government control, and massive investments followed. This has contributed to China’s prosperity and economic rise. A similar investment boom can take place in India through NRIs and OCIs who have the resources and expertise in manufacturing and technology.
Indian diaspora’s direct investment should be incentivised, perhaps in terms of a plug-and-play model to ensure that they do not end up spending lots of time in getting approvals to start a business
One-time repatriation of foreign earning: The proposition is to reduce the current rate of 15% on a gross basis on dividends from foreign subsidiaries to 5%. This would lead to more influx of funds and thereby be expected to support local projects.
The government may also consider providing tax exemption on passive income like dividends, interest on bank deposits, income from mutual funds earned by NRIs from India, if such income is reinvested back in India. Also, capital gains should be taxed at 50% of applicable rates for next 3 years.
Incentives for attracting new Investments: We need to reconsider the approach to taxing interest, dividends and royalty paid to overseas investors.
For instance, though interest on several forms of debt qualifies for a concessional 5% tax rate, this is limited by fairly stringent thin capitalization norms.
The government could consider a 3 to 5-year moratorium on the applicability of thin capitalization norms to ensure that businesses are able to leverage on low cost borrowings from group entities abroad.
The government may consider relaxation of norms pertaining to issue of shares to resident entities owned by NRIs.
Further, relaxation should be provided for any funds received from NRIs, subject to production of simple documents such as Bank Foreign Inward Remittance Certificate (FIRC) /KYC documents.
- An Off-Shore investment centre like Singapore can be opened in Mumbai where Indian domestic laws and taxation will not be applicable.
MNCs may route their investments into India through the Off-Shore Centre in Mumbai.
Foreign legal firms and banks along with domestic institutions can be invited to have a presence in the Off-Shore Centre.
A lot more needs to be done, however, to resuscitate the country’s growth engine.
At this critical juncture, what India needs is a two-pronged strategy to successfully navigate the current crisis and recover strongly thereafter.
First, minimise the damage caused by the COVID and clear a path to recovery and second, rebooting and re-imaging India by promptly exploiting new opportunities unleashed by evolving business scenarios.
The three mantras should be Bigger, Bolder and Faster execution of this strategy.