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Budget 2021: Infra push can boost economy, improve competitiveness

Rumki Majumdar     January 18, 2021

The changing norms in the world post-COVID-19 have forced businesses to change their ways of doing business. As India gradually turns towards the road to recovery, consumers, businesses, and industries are expecting measures and relief in the Union Budget 2021 that can help them outmanoeuvre pandemic-related challenges and thrive in the future. We expect thegovernment to focus on three key issues.

Infrastructure, health, skills, and defence to spur activity, demand, and jobs

The government will likely focus on investing in building robust infrastructure and productive assets, which willbe key in realising India's self-reliance ambition.Infrastructure is one area where India needs to scale up significantly to compete with its peers globally.

According to Oxford economics, India spends around 4% of GDP on infrastructure as against China that spends over 6% of GDP. India needs to spend at least 1.5% annually more to meet UN sustainable development goals. Disputes around infrastructure contracts between the government and contractors often result in implementation delays and cost escalations.

Also read: Budget 2021: Centre to hike import duties by 5-10% on 50 items

This year, Finance Minister Nirmala Sitharaman must emphasise on infrastructure investment, which willtranslate into employment generation,livelihood for low- and semi-skilled workers, and demand for goods and services offered byMSMEs. Allocation for judiciary infrastructure will result in swift justice and resolution of pending cases leading to improved investment sentiments.

The infrastructure development plan may also involve boosting health and social care. To make the country ready to deal with similar challenges in the future with higher resilience, the government must increase spending on healthcare infrastructure from the current 3.5% of GDP to at least 5% this year and target to reach the world average of 10% over the next 10 years. The government may spend some amount on upgrading and procuring defence resources to support operational capacities amidst geopolitical tensions.

To tackle demand and job creation, there may be a focus on allocating resources to address structural challenges obstructing MSMEs' growth; skill development opportunities, including upskilling and reskilling talent, to empower the workforce with the changing nature of jobs;as well asannouncing more schemes and incentives for the agriculture sector.

Additionally,tax cuts (for both personal and corporate income) may get introduced. However, keeping in mind that revenue income is low this year, the benefit may be given to those who have been most hit by the pandemic.

Also Read: Three key issues Budget 2021 should focus on

Funding expenses and managing the fiscal deficit will be key

While the government may adopt the Keynesian economic theory of spending during recession to prioritise growth with social objectives,the nature of spending will be crucial. Rationalising spending by reducing spending on revenue expenditure and raising capital expenditure will be welcomed in this budget by investors even if it means a higher fiscal deficit for an initial few years. Once the momentum picks up, the government can consolidate its expenses in the future.

That said, the government must figure out how to fund its expensesand it must do so immediately.Investments with lagged returns such as infrastructureoften face funding challenges. The likely proposal to create a bank to fund infrastructure spending is a great step forward. External borrowing, strategic disinvestments, and public-private participation could be a few other options to explore.

With equity prices at an all-time high, this might be a ripe time for the government to disinvest. For revenue buoyancy, a stabilisation of the GST rates, broadening the tax base while finding new sources of revenues, improving the basic IT infrastructure hurdles for filing taxes, and plugging loopholes that encourage tax evasion could be a few smarter ways.

Also Read: Budget 2021: Sell stakes in PSUs; prioritise spending to boost economy, says Raghuram Rajan

Improve the ease of doing business environment

The second important focus will likely beon improving the business ecosystem and ease of doing business. Some of the announcements may involverationalising the tax structure (change the GST rate structure and ease compliance requirements); investing in improving logistics; allocating resources to ensure social and health protection for workers, inclusion, and better implementation of labour and land laws; and spending on digitisation.

Increasing export footprint in the world

Enhanced value addition in industries, including MSMEs, might be the third focus to enhance India's share in the global export market and move up the global value chain.The government may promote specialisation and investment in sectors where India has a competitive advantage and that are labour intensive. Schemes to improve local networks and efforts to expand economic corridors in Tier 2 and 3 cities should be considered, especially when virtual working is opening up opportunities. Sops and incentives to scale-up facilities, allocations for building IPR and promoting innovation, favourable trade policy announcements, and measures to address logistics and coordination costs associated with world-class transport and communication may get addressed in the budget.

All eyes are on the budget asthe government walks a tightrope of balancing growth and fiscal concerns. Effective implementation of the proposed budget will be key.

(The author is Economist, Deloitte India.)


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