News: Investment climate in India is looking very positive

(BL 27/02/2007) New Delhi - Subbu Subramaniam, Investment Partner, Baring Private Equity Partners (India) on 'what investors should expect from the Budget' or 'steps to boost investment-expectations from the Budget'

"Over the years, more and more Institutional investors have started believing that the budget as a trigger for the markets is becoming less and less important. This is in sharp contrast to what the situation was when I was a Management student; when the courses in Long Term Corporate Planning seemed so irrelevant and out of context, since Indian Corporates lived by the Annual Budget and the customs duty protections that were levied every year. There was an attempt at "Long term Fiscal Policy" by V.P. Si ngh in 1985, wherein the Government, led by the ruling party stated that they intended to stick with their intent for a period of five years until the Indian democracy yielded to a coalition format of politics and policy determination.

The fact remains that liberalization as a process is irreversible in terms of direction and we have all seen and reaped the benefits of the same, like the car manufacturing license policy and telecom licensing policy to name a few. But the pace of change leaves a lot to be desired, as it has been "frustratingly slow". The budget announcements are today looked at for the signal of the "pace" of change and addressing macro issues like allocation to education, health care sectors as opposed to agriculture (food and fertilizer subsidies) and defence.

Given the current structure of the Indian economy where services constitute more than 50% of our GDP, which is also growing at a rate faster than the total economy, it is imperative and important that the right fillip is given to sustain the growth while the global opportunities exist! The one action that is necessary for this is to encourage investment and government allocation for education.

The masterstroke of levying service taxes conceived and executed by the Finance Minister and team over the last 3 years with an increasing list of services being brought into the net has ensured that the revenue collections are growing at an unabated

pace and are contributing substantially to the growth in revenues. There is now scope and need to judiciously consider breaks / exemptions in service tax applicable to educational / vocational training enterprises, be it Information technology (IT), BPO, re tail or manufacturing, to meet the exponentially growing manpower needs of the segments in these sectors through job creation / skill generation.

Another very important aspect of Income Tax that could be considered is the possibility of treating Capital Gains earned from sale of securities to Qualified Institutional Buyers (QIBs), Foreign Venture Capital and Indian Venture Capital (duly registered with SEBI) on par with the long term Capital Gains from sale of securities on the Stock Exchanges. This will effectively mean that the long-term capital gain is not exempt from tax. This will go a long way to accomplish the following:

A) Create liquidity for the entrepreneurs of young companies even as they continue to grow their businesses,

B) Attract Capital from Foreign and Indian VCs, QIBs and assets in Capital formation at the SME level,

C) Avoid / defer the listing of younger companies who are not yet ready to comply with the stringent regulations of disclosure, independent Directors, bear compliance costs. This will increase the quality of listed companies and reassure the international investors.

There is no doubt that the investment climate in India is looking very positive at the moment and we are currently the flavour of the world. However, few steps like the above need to be taken to sustain this momentum and put India as a 'destination of ch oice' on the global map."