India's 2012-2013 Budget to Strengthen Investment Environment

By Xiaolei Gu

Mar. 22 – India’s 2012-2013 Budget, released on March 16, seeks gradual growth recovery and solutions to rein in deficits by boosting domestic demand and reviving private investments. In this article, we outline some of the new Budget’s key measures aimed at improving India’s investment environment.

According to the Budget, India’s GDP growth in 2012-2013 is projected to come back to 7.6 percent, after the economy slowed to only 6.5 percent in 2011-2012, and the country’s fiscal deficit will constitute 5.1 percent of GDP in the 2012-2013 fiscal year, compared with 5.9 percent of GDP in the 2011-2012 fiscal.

Measures to strengthen investment environment
In the new Budget, the government proposes to raise 30,000 crore through divestments in central public-sector enterprises. Along the same line, specific measures are introduced to strengthen the investment environment in India.

Foreign direct investment (FDI)
FDI in single brand and in cash and carry wholesale trade is permitted to 100 percent, while FDI in multi-brand retail trade up to 51 percent is held in abeyance for further consultation.

Advance pricing agreement (APA)
The implementation of APA will be introduced in the Finance Bill (2012) to bring down tax litigation and provide tax certainty to foreign investors

Finance sectors
Rajiv Gandhi’s Equity Savings Scheme will be launched to allow income tax deductions of 50 percent to new retail investors who invest up to 50,000 rupee in equity and whose annual income is below 10 lakh.

Capital market reforms
Various measures will be taken in order to reform India’s capital market, including allowing qualified foreign investors to access India’s corporate bond market, simplifying the IPO process, and permitting conditioned two-way fungibility in Indian Depository Receipts.

Legislative reform
Various laws and amendments, such as official amendments to “The Pension Fund Regulatory and Development Authority Bill (2011),” “The Banking Laws (2011)” and “The Insurance Law,” will be moved in the budget session of Parliament.

Capitalization of banks and financial holding companies
The government proposed 15,888 crore for capitalization of banks. Meanwhile, a comprehensive action plan will be introduced for implementation in the 2012-2013 fiscal year.

Priority sector lending
The government will issue a revised guideline on priority sector lending

Financial inclusion and regional rural banks (RRB)
The Indian government proposed to extend the “Swabhimaan” campaign that brings banking establishments to the country’s more rural areas. Meanwhile, more RRBs have joined the National Electronic Fund Transfer System. The scheme of capitalization of weak RRBs will be extended by another two years.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. To contact the firm please email asia@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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