The Modi government was sworn in at a time when the economy was facing several challenges: The Gross Domestic Product (GDP) grew at sub-5 per cent for two consecutive years, inflation was above the Reserve Bank’s comfort zone and both investor and consumer confidence had been shaky.
Now, 100 days later, business sentiment seems to have perked up somewhat and factory order books are improving as reflected in the HSBC Purchasing Managers Index that was up to the level of 53 in July as against 51.5 in June. With official data showing the GDP during April-June at 5.7 per cent, the highest in 10 quarters, business confidence is likely to look up further.
One of the earliest decisions the government took, even before it presented the Budget, was to extend the excise duty concessions the previous dispensation had given to boost demand in the passenger vehicle and some other sectors. The passenger vehicle sector seems to have turned around with July showing a positive growth in sales for the third straight month.
The 2014-15 Union Budget was the first big statement of intent of the government. It promised India would no longer resort to retrospective taxation, a long-standing and significant grievance of investors. The government has thereafter taken steps to make the tax regime more predictable and investor-friendly through an improved system of advanced rulings and dispute settlements.
The Budget signalled an intention for subsidy reforms for the plugging of leakages in the delivery system, which the government has since followed up with the setting up of the Expenditure Reforms Commission under former Reserve Bank Governor Bimal Jalan. Acting on another Budget proposal, it has set up a committee set for reviewing the economic cost of foodgrains payable to the highly inefficient Food Corporation of India.
Following up on its Budget announcements, the government has notified the easing of the foreign direct investment (FDI) cap in defence and introduced a Bill in Parliament to do the same for insurance. The opening up of these two sectors is likely to generate enhanced investments in the two sectors, especially in defence manufacturing. The FDI conditions for the development of housing have been relaxed too.
In a multi-pronged attack on price rise, particularly in food items, the government announced a price stabilisation fund set up with a Rs. 500-crore corpus. In consultation with the States, it threatened to make hoarding a non-bailable offence, slapped export curbs on onions and other items prone to seasonal increases in prices and moved to hike allocations from the buffer stocks of rice to the poor. It also released from its granaries wheat supplies into the open market for stabilising cereal prices. As a result, headline wholesale price inflation, after remaining persistently in the 7 per cent to 9 per cent range during 2011-13, is beginning to moderate. It was down to 5.19 per cent in July, the latest month for which official data is available. Retail inflation too has fallen from 8.6 per cent in April to 7.96 per cent in July, despite the less than satisfactory monsoon.
Quite in line with Prime Minister Narendra Modi’s Independence Day Speech in which he called for making India a global manufacturing hub and gave the slogan of “Come, Make in India,” the Budget gave tax incentives to business. It expanded the scope of the definition of Micro, Small and Medium Enterprises, which yield about 40 per cent of India’s total output.