Domestic capital in economic development
Our economic growth has been facing headwinds which is primarily cyclical in nature. The policy makers, the regulators and the system are making an honest effort to restore it. Many fiscal and monitory policies have been announced and implemented sincerely. These measures, it is expected, will bring the desired outcome. Two major dilemmas are confronting the economy. To improve consumption and encourage more private and public investment through better liquidity.
On examining the Ministry of Finance data on finance receipts budget, one finds that the amount applied by charitable entities for the purposes for which these have been set up during the financial year 2017-18 was in excess of Rs 5 lakh crore. A further examination of the income earned by such trusts suggests that these organisations invest in prescribed investments and avail of the tax benefits applicable.
The asset classes permissible under the provisions of the Income Tax Act suggest that such eligible investments include investments in savings certificates, account with post office savings bank, investment in the units of Unit Trust of India, investment in government securities, deposits with public sector companies. The Act also empowers the tax department to make addition to the list of eligible investments. Under rule 17C of the Income Tax Act, additional investment is set out and inter-alia allows a charitable institution to invest in units of mutual funds registered with Sebi.
An evaluation of these asset classes suggests that these are low-yielding assets. On one side, they channelise the investments into the most soughtafter risk-free investments yielding negative inflation adjusted returns, thereby reduce the ability on part of the charitable institutions to allot more funds for education and health care purposes. Current permitted instruments provide returns below inflation (of ~6 per cent pa on a tax adjusted basis) and create illiquid assets, thereby reducing finances for scholarships, improving educational quality and research.
Charitable trusts and universities in India have historically invested a significant portion of their available resources in real estate or in basic financial instruments. These institutions have been unable to support the need for capital in growth sectors due to constraints. A sizeable amount of funds is locked up which can be invested in productive assets for the economy. Charitable institutions are generating an estimated nearly Rs 90,000 crore of surplus investible capital per annum. This amount, if freed, can be utilised for promoting consumption as well as for capital expenditure. Both in India and globally, insurance companies and pension funds have seen good success by investing in alternative asset classes. Indian charitable institutions should be allowed in diverse asset classes to be able to generate better yields, thereby have more resources to support the cause for which they are set up. There is a critical need to enable charitable institutions to invest in a wide variety of asset classes such as private equity, infrastructure and other instruments, which can provide higher inflation-adjusted returns. Charitable institutions should be allowed to invest in Sebi-regulated entities such as AIF, REIT and InvIT, in addition to the currently allowed list of eligible investments.
The Government of India have taken significant initiatives to strengthen the economic credentials of the country and make it one of the strongest economies in the world. India is fast becoming home to start-ups focused on high growth areas such as mobility, E-commerce, and other vertical specific solutions – creating new markets and driving innovation. Rise in domestic investments has been one of the biggest contributors to the India growth story and public and private sector have both enabled and sustained these investments.
The Government of India has taken several initiatives across sectors to improve the overall economic condition in the country. Some of these are:
- Mr Nitin Gadkari, Union Minister for Road Transport & Highways and MSME stated that the government aims to enhance MSME’s contribution to GDP from ~30% to 50%; in exports from 49% to 60%. He also said that the government aims to create 5 crore (50 million) additional jobs in the MSME sector, which currently employs ~110 million people.
- On September 09, 2020, Union Minister of Finance & Corporate Affairs, Ms Nirmala Sitharaman inaugurated ‘Doorstep Banking Services’, by Public Sector Banks (PSBs), which enabled customers to avail all the banking services right at their doorstep through the universal touchpoints of Call Centre, Web Portal or Mobile App.
- On June 01, 2020, the Government of India launched ‘PM Svanidhi Scheme’ to help street vendors resume their livelihood activities. It targets to benefit >5 million street vendors. Under this scheme, vendors can avail a working capital loan of up to Rs 10,000 (US$ 137), which will be repayable in monthly instalments in the tenure of one year.
- Atal Innovation Mission (AIM), NITI Aayog, in September 2020 launched the ‘Aatmanirbhar Bharat ARISE-Atal New India Challenges’ programme to boost research and innovation in Indian MSMEs and start-ups by providing funds up to Rs 5 million (US$ 0.08 million) to support speedy development of the proposed technology solution and/or a product.
- As of September 09, 2020, a sum of ~Rs 1.03 billion (US$ 1.4 billion) was released by the Ministry of Road Transport and Highways a part of Aatma Nirbhar Bharat, in building road infrastructure in the country. Another sum of Rs 24.75 billion (US$ 0.3 billion) is being processed and likely to be released soon.
- In August 2020, Prime Minister, Mr Narendra Modi, launched a financing facility worth Rs 1 trillion (US$ 13.75 billion) under the ‘Agriculture Infrastructure Fund’. In August 2020, Japan committed ~Rs 35 billion (US$ 472.94 million) as ‘Officia