Budget does impact the economy significantly, through the expenditure allocations-capital and revenue -- tax proposals effect on economic growth, and in outlining how fiscal deficit will be covered. The extent of fiscal deficit and the means to finance it also has a bearing on money supply and the interest rate during the fiscal year.
Last year's Budget focused on growth and well-being when the country was still negotiating through the pandemic, with higher capital outlay and a significantly higher outlay on health and well-being. This was despite low base economic growth (-7.3 per cent) during the previous financial year (FY 2020-21) and the general mood of despondency and uncertainty. Economic indicators so far tell that Indian economy is likely to grow over FY 2019-20 GDP, the pre-pandemic year; if the current year's GDP growth is 8.7 per cent it will go over FY 2019-20 GDP by about 0.9 per cent and if it is 9.4 per cent, the economy will top up FY 2019-20 GDP by 1.5 per cent. To break current year's GDP into its constituents: private consumption (based on Q2 figures) has grown by 8.6 per cent, gross fixed capital formation went up by 11.0 per cent, exports surged by 19.6 per cent and the government spending rose by 8.7 per cent. All these suggest a healthy growth during the year, but the country may need a stronger growth during the next FY.
The general expectation is that the government would continue on the current year's philosophy and further increase capex spending. Important in that, however, will be to bring measures to encourage private sector participation, which continues to be low as per a RBI report. Tax measures, such as group taxation, to tide over the SPV-based infra contracts could help in making private players more viable and help in increasing their participation; a measure which is already in vogue in Malaysia and other SE Asian countries. There could however be certain anti-abuse provisions so that the measure on group taxation is not misused.
It will also be useful to allow foreign long-term infrastructure investors such as sovereign wealth funds, pension funds, private equity funds, bonds, etc., for infra financing. This will augment the current finances from banks and NBFCs which otherwise have shorter liability profile with asset liability mismatch. This creates stress on the system. Even domestic pension funds could be leveraged suitably for the purpose if such financing gives them better returns on investment. This may also relieve the fisc from budgetary support. To add, the government could also bring a new credit rating system for infra projects, so that there is more openness about the projects.
The government brought National Asset Monetization Plan of Rs. 6 lakh crores in October 2020 covering the road sector (27 per cent), railways (26 per cent) and power (15 per cent). The idea was to unlock economic and business value of these assets and use them gainfully. Current fiscal target set by Niti Aayog, is Rs 88,190 crore. While the roads and power ministries are in line to meet their targets, others such as the railways, petroleum, mining, and sports appear to be behind the schedule. Road and power projects have gone fast off the blocks, thanks to the big role played by InvITs and toll-operate-transfer mechanisms. Brownfield projects in other lagging sectors would also need similar mechanisms in the upcoming Budget.
India has 6.6 crore MSMEs, generating 40% employment in non-farm areas and contributing 25 per cent to the services sector and 33 per cent to manufacturing. The government provided them credit line of Rs. 4 lakh crores at the time of their extreme sufferance. It seems our expectations from them must go up. Quite mindful that 99.4 per cent of the MSMEs are micro enterprises, and the remaining constitute small (0.52) and medium (0.1 per cent). Their output is at present sub-optimal, because of their size. The government could consider developing SME clusters so that their scale could be leveraged and their output enhanced substantially so as to contribute to the growth of the economy.
Analysis suggests that the Indian industry has not really moved on to innovation and R&D, a theme of the current year Budget also, if we use the number of patents filed by them. It is time that the industry puts the R&D incentive to better use. The criticism that it is too low, may be true. However, it is also useful to mention that the notion that incentives bring investments or patents, is contestable. Nonetheless, the government, just to be on the right side of other country practices in the Asia Pacific region as well as for OECD, could consider enhancing the R&D incentive index with a simple, demonstrable output measurement.
India is home to more than 1300 Global Capability Centres (GCCs), employing more than 13 lakh people directly and generating over $33.8 billion in annual revenue. The government could consider widening as well deepening it further to increase global share from 52 per cent to almost 65-70 per cent, with some support in infrastructure development, increased investment in skill development, creating an ecosystem that fosters innovation, and of course consistent tax policies. The government could consider bringing fast track APAs for this segment to bring more tax certainty. Basic objective should be to bring more regional headquarters of MNEs to India; Singapore gets a fair share of that at present. This will bring higher end jobs, and also more revenues to the country.
Finally, attention to improving private consumption cannot be emphasised enough. The Indian growth story has so far been propelled by consumption only. On that, increasing standard deductions will definitely help in putting more money in the pocket of individuals. Increasing interest deduction limit on home loans can have twin benefits, give a fillip to real estate (a crucial sector) and consumption growth. In a Covid-affected year, medical expenses have gone up. So, increase on that also is required. These may be small changes, and may not cost the exchequer much, but will improve the sentiments further. The Budget in any case has to be growth enhancing!!
Views are personal. The author is partner, Deloitte India.
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