By Richard Rossow
The importance of India’s Union Budget as a reform tool has steadily declined. The most significant budget-related measures this year were format changes: moving the release date up a month, folding in the budget for India’s massive railways system, and removing the distinction between “plan and non-plan” expenditures. The reduced focus on the budget is most welcome, though some provisions could be relevant for their impact on U.S.-India relations.
There was far less anticipation in the run-up to the Union Budget’s release than in previous years. This may be due to the lingering impact of demonetization, forthcoming key state elections, or the fact that this is the “middle budget” of the Modi government’s term in office.
While we do not yet know the new focus areas for the Trump administration’s engagement with India, we can expect that it will be a mixture of economic and security workstreams. The budget and announcements in the accompanying “Budget Speech” contain numerous provisions that would likely impact our economic and security cooperation. Some highlights:
Impact on U.S.-India Ties: Positive
- Abolishing the FIPB: The government intends to abolish the Foreign Investment Promotion Board (FIPB) in the coming fiscal year. Most likely, all approvals will shift to the “Automatic Route.” While most approvals are already routed through the Automatic Route, the FIPB still handles investments that are particularly large and/or considered “strategic.” Presumably, a shift to the Automatic Route will also entail a clearer articulation of guiding provisions in these sectors, which will add clarity to investors on what will, or will not, be allowed.
- Reduction in customs duty on liquefied natural gas from 5 percent to 2.5 percent: The United States is an emerging natural gas supplier to India; this tax reduction may give a boost to trade in this key commodity.
- Creation of CERT-Fin: India will create a new Computer Emergency Response Team (CERT) for the financial services sector. This could be an important new platform to deepen cybersecurity cooperation as the number and scale of attacks increases over time.
- Tax Reductions on Point of Sales Machines & Components: To spur growth of digital payments, India will reduce various taxes including customs duties on machines, parts, and components used for emerging models of digital payments.
- Foreign portfolio investors exempted from transfer provisions: India’s domestic indirect transfer rules will not apply to overseas shares transfers when the domestic transfer is already a taxable event.
- Legislation to End Illegal Financial Deposits: If India expands its toolkit for finding and dealing with illegal deposits, this may boost counterterrorism financing cooperation between our countries.
Impact on U.S.-India Ties: Negative
- Price Controls on Pharma & Medical Devices: Finance Minister Arun Jaitley announced further steps to reduce prices for medicines and medical devices. India’s healthcare pricing policies have been a point of friction between the United States and India in the past.
- Creation of New PSU “Oil Major”: The Finance Minister announced a plan to create a new global oil major “which will be able to match the performance of international and domestic private sector oil and gas companies.” This could lead to more competition between U.S. private sector entities and this new Indian firm, which would be less driven by equitable economic decision-making.
Naturally, there are a range of other announcements whose impact on U.S.-India relations is unclear, though possibly significant. For example, measures to expand the use of solar power are welcome when seen through the lens of India’s commitments on global emissions, but could cause some friction if they amplify concerns over domestic manufacturing requirements in the solar industry. A modest increase in defense spending continues to hold out the promise of greater U.S. defense sales, though India’s slow, tortuous process in completing modernization acquisitions moderates enthusiasm.
The reduced focus on the Union Budget as India’s singular tool for policymaking is quite welcome, showing that perception is slowly catching up to reality. Still, it is a significant annual event, and contains a range of provisions that will likely impact the U.S.-India relationship in the years ahead.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.