EU budget for 2022 expected to ease regulations and boost investment

Financial sector reforms are essential to stimulate private investment. Business risks arising from stricter NPA standards and insolvency laws need to be reconsidered.

No developing country like India can grow at the desired rate without the corresponding rate of investment (GFCF). For this, the relaxation of bank loans and the relaxation of business law and taxation are crucial, which motivates entrepreneurs. Growth must be consistent, for which, exports must grow in double digits.

Investment and export driven demand is the right choice over consumption driven demand. Therefore, policy announcements and resource allocations in the budget should point in this direction.

In 2021-22, real GDP could be around 147 trillion rupees compared to 146 trillion rupees in 2019-20. Currently, the macro parameters such as the investment rate (GFCF), high inflation (big), the increase in the trade deficit, the decline in bank credit and the savings rate and the overall tension in the sector of MSMEs are not supportive. Therefore, the growth estimate for 2022-23 by various agencies of 7.0-8.5% is somewhat optimistic. Before the pandemic, the economy was in decline and GDP growth was just 4% in 2019-20.

However, the investment rate plunged from 38.1% in 2007-08 to less than 30% of nominal GDP; which must be pushed to 35%. The nation’s overall financial resources should be allocated in a planned manner so that; the “incremental capital production ratio” (ICOR) is reached above 4.0. This will facilitate GDP growth to 7.0-8.5%. Investment in the MSME sector provides the highest ICOR; which must be encouraged in a structured way.

Of total investment, infrastructure investment is expected to represent around 12.0-15% of nominal GDP. Highly viable infrastructure projects can be auctioned. Normal and semi-viable projects should be implemented through SPVs in which states, UAPs and the private sector can be included as shareholders. In semi-viable projects, additional budget grants may be provided to the SPV for Viability Gap Financing (VGF). About 65% of the costs can be financed through debt, preferably through bonds with a sovereign guarantee. Non-viable projects can be postponed for 2 years or can be funded by divestment and auction proceeds. By this, budgetary resources can be multiplied by 4 to 5 and so; the infrastructure spending target can be easily achieved. Spending should reduce the cost of logistics and energy and develop human capital and thus improve the overall efficiency of the economy and global competitiveness.

Financial sector reforms are essential to stimulate private investment. Business risks arising from stricter NPA standards and insolvency laws need to be reconsidered. As an alternative financing, the corporate bond market needs to be boosted by tax incentives or sovereign guarantee, especially for capital-intensive projects. The huge potential of the bond market in India must be exploited; this will ease the burden on banks and also compensate for the domestic savings shortfall.

Bank credits to the MSME sector should be boosted through a structured credit guarantee system and the reinstatement of loan restructuring in deserving cases. Banks should increase the capital adequacy ratio to share commercial risks and implement a “self-insurance mechanism”, We must recognize this; in a developing economy, the risk of bad debts is inevitable. This needs to be shared by borrowers, banks and government in a structured way. Too much hype around NPA standards and distrust of bankers and entrepreneurs will be counterproductive.

Currently, business and tax laws are not so encouraging for business expansion. Very often business failures are equated with crime. Even delay or non-compliance leads to criminal prosecution. India needs to overcome the past legacy of colonial laws and the syndrome of excessive and harsh regulation. Criminal prosecution should be a last option with prior approval from higher authority. The existence of a criminal intent must be an essential criterion before initiating criminal proceedings.

Several studies have concluded that trade laws and regulations should prevail, but they should be simple and consistent with the majority and should lead to development results. Legislative intent must be disclosed in the preamble of each statute. Facilitation must coexist with regulation. By this, the respect for the law will progress and the respect for the law and the institution will succeed.

Most business laws and regulations are designed with big business in mind. For medium-sized companies, these are indeed difficult to fully respect. The Indian Companies Act 2013, environmental regulations and land acquisition laws are some examples. This list is too long and is growing every year.

Similarly, several archaic regulations in other sectors have turned India into a high cost economy; which needs to be redesigned. India’s economic efficiency must be improved to achieve the nation’s prosperity. An administrative circular lifting these impediments will send a positive message to job providers to join the team.

Over a period of time, India is witnessing such a situation, in which, every regulator and tax practitioner is seeking more powers to punish business ventures. Facilitation jobs are rarely preferred. While delegating regulatory powers, an additional responsibility to facilitate business can also be delegated. Empowerment without accountability is never good for the developing nation.

Any productive asset, regardless of management control in the private or public sector, generates jobs, public revenue (GDP) and public revenue (taxes). These should be treated as national property and protected in the public interest. Such a message should go below the line to the district level. All these bold reforms will boost the morale and fighting spirit of entrepreneurs, and thereafter the economic crisis will be a trivial problem. On the contrary, India will bounce back with a bigger push.

(By RP Gupta, author, Turn Around India, Jan Andolan & Turn Around India-2020)

Disclaimer: Opinions are personal

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