Why the Modi government in India holds promise for US investors (Part 1 of 4)
What U.S. expects from the 2014 Indian budget
“The global community is ready, with billions of dollars in long-term capital, to increase investment in India,” said Diane Farrell, the acting president of the U.S. India Business Council (or USIBC).
According to Farrell, the budget was an extremely important opportunity for India’s administration to begin to meet the high expectations of both the Indian and international investment industry.
The Obama administration, policy makers, corporate sector, and economists in the U.S. had all been hoping to see a strong sign of major economic reforms from this budget, as Prime Minister Narendra Modi promised during his election campaign. Corporate America was particularly hoping that the budget would bring in an era of clarity, predictability, and transparency in the system that would help in creating an investment-friendly environment.
Popular U.S. exchange-traded funds (or ETFs) investing in India include the WisdomTree India Earnings Fund (EPI), the iShares MSCI India ETF (INDA), and the iShares S&P India Nifty 50 Index Fund (INDY). Unlike the U.S. centric funds like the SPDR S&P 500 (SPY) which invests in the 500 largest U.S. firms like Apple (AAPL), ExxonMobil, and General Electric, these India-centric ETFs invest to make gains from the Indian equity markets. These ETFs have major holdings in companies like Infosys Ltd. (INFY) and HDFC Bank Ltd.
Indian Finance Minister’s three goals
On July 10, the Indian Finance Minister Arun Jaitley, presented the Union Budget for the 2014–2015 financial year. Presenting his maiden budget, Jaitley stuck to the three goals he had defined for himself:
- Boost growth
- Contain inflation
- Reduce fiscal deficit
He concentrated on fiscal consolidation, delivering a fiscal deficit target of 4.1% of gross domestic product (or GDP) for 2014–2015 and 3% by 2016–2017. By keeping government borrowing low and additional taxes only on spending items like dividends and cigarettes, Jaitley intends to keep inflation low and reward savings and investment in order to push growth.
Key measures to achieve economic objectives
To achieve the economic objectives of restoring the pace of growth, containing inflation, and concentrating on fiscal consolidation, Jaitley made the following announcements, as he presented his maiden budget to the Indian Parliament on July 10, 2014:
- Foreign direct investment limit for insurance and defense was raised to 49%
- An additional 3% tax was imposed on dividends
- A host of protectionist duties on imports put in place to spur domestic manufacturing
- Tax on travel by radio taxis, advertising through mobiles and online media, and import of coal
- Import duty on gold retained
- Restricted the standard operating procedures to domestically manufactured LCD and LED TVs, mobiles, and footwear
Continue reading the next sections of this series to learn whether the 2014 Indian Union Budget lived up to investor expectations.
Browse this series on Market Realist: