India’s 2017 Budget: What should SME investors look for?

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By Dezan Shira & Associates 

The countdown to the 2017 Union Budget has begun.

The government will announce the budget on the first day of February, one month ahead of the traditional announcement on the last day of February. This new date was inspired by the government’s wish to solidify the budget ahead of the new financial year, a grace period that many businesspeople will appreciate after the shock and awe of November 2016’s demonetization.

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Finance Minister Arun Jaitley is expected to revise income tax slabs, promote cashless transactions as well as offer some relief for struggling farmers and incentives for the real estate sector. Foreign investors with interests in India will no doubt monitor the budget for these initiatives and others, but what should business leaders from SMEs look for in the budget?

Corporate tax reduction

The government previously announced an interest in reducing the corporate tax rate from 30 percent to 25 percent over several years. This initiative was inspired by a need to make the country’s corporate tax rate more competitive – corporate tax rates range between 16 and 25 percent across Asia – and rationalize exemptions, cesses and surcharges. However, the government has not made much of any progress to date: Businesspeople will therefore be on the lookout for any reduction in the overall tax rate or any reforms signaling a gradual transition

Infrastructure development

Infrastructure spending has featured prominently in this government’s previous budgets, but many economists believe that it is now more important than ever. Following a slow-down in private investment, and the impact of demonetization on the unorganized sector, government spending on infrastructure would encourage investors’ confidence and stimulate job creation. However, businesspeople will closely watch how the government prioritizes its expenditure, and particularly how it balances support for traditional infrastructure, such as roads, power and housing, and new initiatives, such as digital infrastructure.

Manufacturing incentives

The government has stated that it would like the manufacturing sector to account for 25 percent of the country’s GDP. While manufacturing’s contribution to the GDP has grown to 17 percent, the shortfall has become particularly glaring given the high profile Make in India campaign and increasing concerns over jobless growth. Will the government double-down to reinvigorate manufacturing or cut losses to support services, information technology and sciences? Seasoned India hands will forecast a middle-way, and business leaders should seek to understand how any federal support for manufacturing complements state-level initiatives.

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Cautious optimism

The decision to move the budget announcement from the end of February to the beginning of the month has demonstrated that this government wants to cater to the business community. The nature of the government’s approach to corporate tax reduction, infrastructure development and manufacturing incentives will, however, serve as an important indicator as to whether this government will continue to unveil big ticket initiatives or fine tune its approach to goals it has already established.

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