India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner & Leader/ Transaction Tax
Pankil SanghviPartner/ Tax & Regulatory Services
The year 2021 has begun well for India with twin good tidings; an upswing in the state of the economy and a downswing in the cases of coronavirus infections – both providing some cheer and rekindling hope, that 2021 could well be India's year.
With the pandemic peaking in September, India seems to have miraculously avoided a second wave and flattened the epidemiological curve. In hindsight, it appears that the initial stringent lockdown was critical to saving lives. The continuous drop in daily cases and fatalities bespeak India's escape from a ‘back-and-forth’ crisis management that would have only derailed economic recovery and cost lives. India has embarked on a massive vaccination drive with two locally developed vaccines. In one of the world’s most expansive vaccine diplomacy efforts, India has contracted to supply vaccines to six neighbouring countries and seems determined to demonstrate its scientific abilities and bolster bilateral ties.
Looking back, in the first quarter of this financial year (April-March 2021), the GDP contraction was down at 23.9%, one of the highest in the world. At that time, there were dire predictions regarding the fate of the world's largest democracy. Fortunately, as the unlocking of the lockdown began across the country, there was hope for revival. The second quarter reported a decline of 7.5%. This prompted grave concerns about the rebounding of business, with speculation hinging on a disappointing U or L shaped recovery. The least expected was a V-shaped recovery, which is seeming likely now.
By late September, green shoots were visible with a sustained resurgence in high-frequency indicators such as power demand, e-way bills, GST collection and steel consumption, among others. But in the nine long months from April 2020, the winner has been agriculture. Fortunately, manufacturing and construction two of the hardest-hit sectors have also started picking up at a steady pace.
The monthly GST collection hit records in December 2020 and encored with an all-time high collection for January of this year, reaffirming that the economy was back on track. It also signalled a strong inter and intrastate movement boosted by the unlocking of industrial and commercial activity. With imports shrinking more sharply than exports, the forex reserves surged to USD 586bn in January (covering nearly 18 months of imports). Other economic indicators such as a sturdy credit growth in the MSME sector (micro, small and medium enterprises) which is India’s lifeline and provides jobs to millions, look promising.
With this positive backdrop, the Finance Minister, Ms. Nirmala Sitharaman, unveiled Budget 2021, primarily heralded as progressive, in the parliament on 01 February. In her budgetary proposals, she focused on six pillars on which she has pinned her hopes for a speedy economic recovery. These pillars are Health and Well-being, Infrastructure, Inclusive Development, Human Capital, Innovation & R&D and Governance. The government's flagship monetary policy of an ‘Atmanirbhar Bharat’ or self-reliant India got top billing in the budget with increased scope and coverage and found itself in the newly sponsored health scheme with an outlay of nearly USD 09bn.
While no-new-taxes was a cause for much celebration, her proposals for divestment with a target of USD 23.30bn, opening the insurance sector to foreign direct investment and privatisation of two public sector banks have received ample praise. The latter proposal will go a long way in providing a direction to the ailing banking sector (already reeling under a high level of non-performing assets) and take care of the need to recapitalise state-owned banks.
Additionally, her proposal for setting up a bad bank for acquiring toxic loans from the banking sector and recycling the stressed businesses back into the economy, at a market-determined price, has also been universally welcomed. Another key highlight was the commitment to invest USD 73.86bn in infrastructure, which is slated to help revive investment. While the GDP decline in the first six months stood at 15.7%; it is expected that the year will end with a 9.5% fall.
With the government and economists celebrating a V-shaped economic recovery, the prospects for robust growth in consumption and investment have been strengthened. The estimated real GDP growth for FY 2021-22 is pegged at 11%. However, concerns remain, that the recovery may turn out to be K-shaped with significant joblessness, that would require urgent attention. There are also apprehensions relating to a possible collapse of the MSME sector that provides the highest number of jobs to Indians, after agriculture.
To conclude on a positive note; after sullen months of despair and fear, people are looking forward, with cautious optimism, to a year that restores hope and good health.
M&A in India
Between December 2020 to January 2021, around 103 M&A deals were announced of which 60 M&A deals were completed. The aggregate value of deals announced is USD 957.83mn; dominated by 68 domestic deals (USD 762.13mn) followed by 35 cross border deals (USD 195.7mn)
In terms of sectors (considering only closed deals), the Financial sector saw the maximum deal value, with deals worth USD 155.01mn followed by the Information Technology sector with deals worth USD 41.31mn and the Materials sector with deals worth USD 36.74mn
Significant Deals completed between December 2020 to January 2021
Target Company: Oasis Realty, Hotel Property
Acquiring Company: Evenstar Hotels Private Limited
Deal Value (in Mn USD): 141.34
- Evenstar Hotels Private Limited acquired a hotel property from Oasis Realty for USD 141.34mn (~INR 10.40bn)
- Evenstar Hotels Private Limited, a wholly-owned subsidiary of Oberoi Realty, has purchased the hotel property situated at Dr. Annie Besant Road, Worli, Mumbai
- As a part of the transaction, Evenstar Hotels acquired the hotel property along with appurtenant rights, proportionate interest in common areas, and conveniences
- The hotel property is a 221 room '5 Star' hotel and will be operated and managed under the Ritz-Carlton brand
Target Company: SBQ Steels Limited
Acquiring Company: Liberty Steel Group
Deal Value (in Mn USD): 36.74
- Liberty Steel Group acquired SBQ Steels Limited for a consideration of USD 36.74mn (~INR 2.70 bn)
- The UK based Liberty group, by acquiring the bankrupt 0.25 million tonne SBQ Steels, culminated a three-year process in which SBQ Steels was put into liquidation after initial efforts to sell it had failed
- The deal with SBQ Steels means a massive haircut of over 94% for creditors. Edelweiss Asset Reconstruction Company (ARC) holds 82% of the total debt owed to financial creditors
Target Company: Eclipse Global Holding LLC
Acquiring Company: Eclerx Services Limited
Deal Value (in Mn USD): 34
Sector: Information Technology
- Eclerx Services Limited, through its wholly owned subsidiary eClerx LLC, acquired Eclipse Global Holding LLC for a consideration of USD 34mn (~INR 2.50bn)
- The objective for the acquisition is to leverage synergies in digital and customer experience services, leverage client relationships and business expansion
- Post transaction, Eclipse Global Holding LLC will operate as a step down wholly owned subsidiary of Eclerx Services Limited
Significant deals announced between December 2020 to January 2021 but not completed
Target Company: Jorabat Shillong Expressway Limited
Acquiring Company: Sekura Roads Limited
Deal Value (in Mn USD): 124.20
- Sekura Roads Limited is acquiring Jorabat Shillong Expressway Limited from IL&FS Transportation Networks Limited for a consideration of USD 124.20mn (~INR 9.16bn)
- Sekura Roads Limited is backed by Edelweiss Infrastructure Yield Plus, an Infrastructure Category-I Alternative Investment Fund
- The transaction is subject to approvals from National Company Law Tribunal and National Highways Authority of India
Target Company: Fairleaf Real Estate Private Limited
Acquiring Company:DLF Cyber City Developers Limited
Deal Value (in Mn USD): 105.61
- Hines Interests Limited Partnership is selling its 51.80% stake in Fairleaf Real Estate Private Limited to DLF Cyber City Developers Limited for USD 105.61mn (~INR 7.80bn)
- The transaction is expected to be completed in the quarter ending March subject to customary closing conditions
- Post transaction, Fairleaf Real Estate will become a wholly-owned subsidiary of DLF Cyber City Developers
“Faith is the bird that feels the light and sings, when the dawn is still dark” – Recalling these words of the famous Indian poet Rabindranath Tagore, the Hon’ble Finance Minister (FM) of India presented the first-ever paperless Union Budget on 1 February 2021. While the Indian economy has been no exception to the pandemic crisis, the FM quoted that India, its people and the industry has exhibited remarkable resilience.
The budgetary proposals announced by the FM rest on the following 6 pillars - a) Health and Well-being b) Physical & Financial Capital, and Infrastructure c) Inclusive Development d) Human Capital e) Innovation and R&D and f) Minimum Government and Maximum Governance, with the government focusing on spending heavily on the first two pillars.Tax Proposals
While it was expected that the burden on taxpayers would go up to compensate for the loss of tax revenues, the Budget did not witness any changes in tax rates.
With a view to attract investments in International Financial Services Centres (IFSC), the government continues to provide tax exemptions from time to time to activities carried out therein. Budget 2021 proposes to grant tax exemption to the relocation of funds into IFSCs, certain aircraft leasing activities and investment division of offshore banking units located in IFSCs.
In a pro-active move, the Budget proposed to remove several anomalies between the withholding tax and actual tax liability. Amongst other measures introduced, dividend payments to REITs/ InvITs would not be subject to withholding tax and income payable to Foreign Institutional Investors (FII) shall now be subject to withholding tax at the applicable tax treaty rates, as against a base rate of 20% earlier. On Equalisation Levy 2.0, the government has clarified that once an income is subjected to tax as royalties/ fees for technical services, the same would not be again subjected to equalisation levy, which eases concerns of foreign businesses who were being doubly taxed on the same income.
To ease concerns of businesses, the time limit to complete revenue audits in the normal course has been further reduced by 3 months. Further, the period of limitation to reopen revenue audits has been halved to 4 years from the end of the fiscal year and gets extended to 11 years only in case of high untaxed income cases.
Continuing policy reforms on its Atmanirbhar (self-reliance) framework, customs duty payable on certain imported items viz., electronics and mobile phones, textile, iron and steel, chemicals, gold and silver etc., are proposed to be rationalised to promote domestic manufacturing; provide easy access to raw materials, and export of value-added products. The FM mentioned that the government is proposing to review the customs exemptions on 400 plus items to boost domestic manufacturing.Policy Reforms
The proposal to increase permissible Foreign Direct Investment (FDI) limit in the insurance sector from 49% to 74% is likely to attract large insurance players and boost investments into the largely untapped Indian market. Further, one of the proposals announced was to consolidate several securities law into a rationalised single securities market code, thereby doing away with multiple laws and boosting investor confidence in Indian capital markets.
As a measure which is likely to benefit start-ups and innovators, the Budget proposes to incentivise incorporation of One Person Companies (OPCs) by doing away with restrictions on their growth on capital and turnover and further allow Non-Resident Indians (NRI) to incorporate such OPCs in India.
On the financial services and capital front, the FM announced setting up of a stressed asset resolution entity, which is likely to take over the stressed loans of public sector banks and recapitalise such banks, which shall give a fillip to lending by banks. The proposal of allowing Foreign Portfolio Investors (FPI) to finance, by way of debt, REITs and InvITs will enable easy availability of funds for the infrastructure and real estate sectors.
While some big bang measures are announced to restore and enable the Indian economy to successfully thrive, the key to success will lie in the execution and implementation of these newly proposed policy reforms.
Click here to watch BDO India’s Tax leaders decode the Budget for our global audiences, in a Budget Highlight video #BudgetwithBDO
Annual Budget 2021-22: An imbalance between economic growth and livelihood?
The 2021-22 budget presented by the Indian Finance Minister Ms. Nirmala Sitharaman seems to have taken the advice put forth in the Economic Survey, brought out by the government two days before the budget, in favour of growth and growth alone, a bit too seriously. No one can counter the fact that growth is a necessary factor for recovering the economy not only through crises such as now, but also in normal times. However, the pathways chosen to push economic growth also need to reflect on the different contours of the economy.
The Budget, while rightfully placing its trust in choosing the infrastructure sector as a vehicle of economic recovery during this unprecedented year of pandemic struck economic downturn, has completely missed the opportunities of paying attention to other pathways that could have complemented it by ensuring to rebuild the losses caused to education, livelihood and employment, income, food and nutrition among the low-income households occupying about one-third of the country’s population.
The focus on infrastructure is indeed a welcome step and has a good potential of generating income, growth and employment. The mechanism of Development Finance Institution financed through Foreign Portfolio Investment (FPI), which is equity investment less than or equal to 10% of capital in a company by Non-Resident Indians (NRIs), provides an opportunity to NRIs to get associated with India’s long-term growth. However, FPI in the past has usually been short term investments with exchange rate risks and using this for long-gestation infrastructure projects may be a challenge. Opening up of the insurance sector for higher Foreign Direct Investments (FDI) is also expected to generate higher off-budget resources.
No new income taxes have been levied, not even a widely talked about COVID surcharge on corporate taxes or one on the super-rich section, hoping that it would lead to a flow of higher capital investment needed for recovery. However, so far, the corporate sector has been very cautious, and investments have not gone up despite low-interest rates. Also, a focus on protectionism and a hike in custom duties for a number of intermediate products to give a push to Atmanirbahar – self-reliant India – does not align with this otherwise open-door policy.
The Budget offers almost nothing for reviving the MSMEs - Micro, Small and Medium Enterprises. No measure exists even for reviving the pandemic affected hospitality sector; a few incentives with linkages to employment could have served two purposes together. The increase in the health sector allocation is largely due to the merger of water and sanitation with health, one-time expenditure on the COVID-19 vaccination and showing the entire six-year initiative of a new health scheme as a part of an annual increase.
The share of Child Budget has declined: the allocation for the Department of School Education and Literacy has gone down as compared to last year’s allocations by about 10% and the allocation for women and child development has also declined by nearly 20% as compared to the last year’s allocations. All these point to an indifference in the budget, towards the poor and vulnerable. The only hope is that the Economic Survey proves right, and the economy really grows, and this growth results in a significant decline in the inequalities as well.
The author works as Director of the Bangalore based Centre for Budget and Policy Studies, Bangalore www.cbps.in. The views are personal.