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Government policies to stimulate investment and growth in India

Updated: Nov 9, 2019

In the recent Union Budget the Finance Minister, Nirmala Sitharaman presented several initiatives to boost investment and growth in the country. The budget was aimed at making India a 5 trillion-dollar economy by FY2024-2025 and was provisioned towards inclusive growth. Given the global climate, the fall in the growth rate (India losing the tag of the fastest growing country to China) and the highest unemployment rate in the last 45 years the budget focused at the grass-root; namely the MSME & infrastructure sector.


The MSME sector contributes 30% to GDP. MSMEs play a vital role in generating employment, output and exports, as this sector contributes one-third to India’s manufacturing output and 45% to exports. According to a recent CII survey, MSMEs are the second-largest employment generator after agriculture, by engaging 12 crore persons. In order to revive the MSME sector which suffered the most in the wake of demonetisation and the implementation of the Goods and Services Tax (GST), the GOI launched ‘MSME Support and Outreach Program’ and announced twelve big decisions to support the growth of small businesses in the country.

The prominent ones include –

● 59-minutes loans

The GST-registered micro, small and medium enterprises (MSMEs) will now be sanctioned a loan of Rs 1 crore in just 59 minutes through a new portal.

  1. MSMEs will be able to apply for loans from SIDBI and 5 PSU Banks

  2. MSMEs will be able to connect with banks without visiting the branch. There will be no human intervention until the sanction and /or disbursement stage.

  3. The portal will be using “sophisticated algorithms” to read and analyse data points from sources such as IT returns, GST data, bank statement etc.

  4. MSMEs can also get loans up to Rs 2 crore without any collateral using this portal.

● Procurement by PSUs

Public sector companies, which were mandated to source 20% of their annual procurement from MSMEs, will now source at least a quarter of their requirement (25%) from the sector.

Women entrepreneurs

Out of the 25% procurement mandated from MSMEs, 3% must now be reserved for women entrepreneurs.

● Government e-Marketplace (GeM)

All central public sector enterprises will have to take membership of the Government e-Marketplace (GeM) to facilitate online procurement of common use goods and services by various government departments and organisations.

● Technological upgradation

The government announced ₹ 6,000 crore package to facilitate better technological support and tools to small industries. The money will be used for 20 hubs and 100 tool rooms for technology upgradation.

Infrastructure Boost

The Union Budget relies heavily on private investment to build infrastructure that would cost ₹ 100 lakh crore over the next five years to rev up manufacturing, boost exports and create more jobs. The Union Budget has proposed to mobilise funds by offering to divest stake in more public sector companies and issuing sovereign bonds overseas. For finding ways to provide long-term financing to the infrastructure sector, the Finance Minister has proposed an expert panel for suggestions. When looking into specificities mentioned by government officials in this area we find –

● The Power Sector

The government is looking at Infrastructure Investment Trust (InvIT) Model to monetize the power PSU sectors. The programme can be started with Power Grid Corporation of India and float InvIT -a first by a PSU entity - to unlock value from its operational transmission assets and free up long-term capital for further investments. The company will not float InvIT immediately but might wait for the right market conditions. The government may not directly benefit from this asset monetisation, as the money from the sale of assets may fall into the books of the PGCIL. However, the centre can always recoup some benefits by seeking higher dividend pay-out from the PSU. With a total asset size of over ₹2 lakh crore and investment of about ₹1 lakh crore in putting up transmission infrastructure, the proposed monetisation programme of PGCIL could provide it with the necessary boost required to push up investments. In order to make InvIT a monetisation tool for the sector, the PGCIL may also rope in more power companies that are looking to free up their capital to raise resources for fresh investments. This would help it attract investors into the trust that would be crucial to building a large corpus.

● Wind Energy Sector

The Environment Minister, Prakash Javadekar on 22nd August 2019 announced a reduction on taxes on wind project to boost investment in wind projects and provide energy at cheaper rates. The environment minister announced to relax lease rent of Rs 30,000 per megawatt charged mandatorily from wind power companies. Currently to establish wind power project over forest land the existing procedure requires payment of mandatory charges for compensatory afforestation at Net Present Value (NPV). This additional cost is not mandatory for other renewable energy projects such as solar and hydel electric projects. The additional cost of the generation of clean energy through wind power escalates the per-unit cost at the consumer level.

Hence this reduction will not only boost investment in wind energy but also strengthen government’s commitments towards international agreements, and one of the national commitments pledged in Paris in 2015 to have 40 per cent power from renewable resources by 2030.

Other important developments

Taxation Measures

o Surcharge

In order to encourage investment in the capital market, the enhanced surcharge levied by the Finance (No. 2) Act, 2019 on long/ short term capital gains arising from the transfer of equity shares/units referred to in section 111A and 112 A respectively have been removed. The surcharge increase was on the income tax outgo of individuals with earnings more than ₹2 crores, in two slabs. FPIs set up as trusts have been saying that they may be assessable by tax officials as associations of persons and are therefore affected by the surcharge increase. The surcharge was raised from 15% to 25% where the income is between ₹2-5 crore and from 15% to 37% for those earning more. In effect, a person earning in the range of ₹2-5 crore will pay 39% tax (called the highest marginal tax rate for that person) on the income exceeding ₹2 crores, and a person earning more than ₹5 crores will pay 42.74% on the income exceeding ₹5 crores. This was one of the factors because of which Indian markets were down by 10 per cent and FPI sold equity close to $3 Billion in 2 months.

o Angel Tax

To mitigate genuine difficulties of startups and their investors, section 56(2)(viib) of the Income-tax Act has been removed for a startup registered with DPIIT. Section 56(2) says that when a closely held company issues shares at a price more than its fair market value, the difference is taxed as income from other sources. This section, touted as an anti-abuse measure, was introduced by former finance minister Pranab Mukherjee in 2012. It came to be dubbed the angel tax owing to its impact on such investments in startups. The commerce and industry ministry had told the finance ministry that the tax was a major impediment to the flow of investments into startups.

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