After three years of multiple, complex and disparate set of challenges ranging from pandemic, war, rising protectionism, high inflation to supply chain disruptions, the world economy is now entering into fourth year with heightened risk of slipping into recession. This has made policy making a difficult choice for governments across the globe. With this background, Union Budget 2023-24 is extremely important especially, as this is going to be last full budget before general elections in 2024.
The government has to manage the fine balance between fiscal prudence while ensuring productive expenditure, announcing growth promoting measures, creating jobs, supporting troubled MSMEs, providing social support to masses, focusing on green energy and continue the infrastructure push. Importantly, there is a need to create appropriate support mechanism in the event of significant global slowdown while managing fiscal challenges. Thus, while there will be many priorities for government in this Budget, few are important to mention.
Thrust on self-reliant India to create more jobs: When countries are moving towards diversifying their supply chains, India should strongly focus on creating opportunities to attract investor’s interest. We expect the government to extend the PLI schemes to new sectors such as electricity storage systems, solar cells and modules, aircraft including UAVs, AI, robotics and automation etc. Besides, accelerating efforts towards one district one product (OPOP) scheme and linking this to create export hubs and developing organised market for traditional products would create growth centres, promoting self -reliance, thereby supporting the rural economy. This would also help in creating jobs.
Support to troubled MSMEs – the biggest job creator
Even as MSMEs are yet to recover from the twin shocks – Covid-19 pandemic and the Russia-Ukraine crisis – they have been hit by a third shock, monetary tightening. Rising interest rates and elevated input costs are hurting their investment plan and bottom-line growth, respectively. On the other hand, the cost-of-living crisis continues to weigh on consumer confidence and demand for goods and services, hurting their top-line growth. In this context, government should continue to provide support to MSMEs.
Given that interest rates are increasing rapidly, support under Interest Equalization Scheme should be restored to 5% for manufacturer MSMEs and to 3% for merchant exporters. The scheme should also be extended to the services sector. Exporters should be provided automatic enhancement in credit limit by 25% without the need of collateral. Further, the pre-shipment credit in foreign currency should have a ceiling of London Interbank Offer Rate (LIBOR) +200 basis points.
Since 2018, import tariffs for several product categories have been raised. All such protection should be accompanied with a ‘sunset’ clause and the government should gradually phase out of import tariff. This will improve the competitiveness of domestic MSMEs. Interlinking of Foreign Trade Policy with Foreign Direct Investment and industrial policies will play a significant role in increasing India’s share of high value-added technology-intensive exports. The One District One Product concept needs to be supported by sufficient infrastructure by the District Industries Centers. The government should also facilitate cross border e-commerce and provide the same benefits as applicable to conventional exports. A target should be set to increase the share of e-commerce retail exports to 10% of merchandise exports by 2027.
The Remission of Duties and Taxes on Export Products (RoDTEP) scheme should be expanded to cover the remaining sectors (specifically the remaining chapters of HS code). There should also be no capping on the rates so as to effectively eliminate the incidence of taxes including embedded taxes, not refunded through GST and other mechanism. RoDTEP should also be extended to Export Oriented Units (EOUs), Special Economic Zone (SEZ), and Advance/ Duty Free Import Authorization holders.
Focus on climate change and energy transition for sustainable growth:
Given the commitment to achieve net zero by 2070 at the COP27 summit in 2022, the government can initiate a discussion of imposing a green tax in the Union Budget. This would send out a positive signal to the global investors especially in the developed markets. On the other hand, the government can also formulate incentives to lure global and domestic investors for green financing, especially, in infrastructure which will also establish India’s credibility in its efforts towards achieving its climate change target. There could be renewed focus to increase the pace of energy transition in the Budget.
Support to masses impacted by three years of crisis
Incentivizing savings of households to brace for an extended period of slowdown such as providing tax incentives for savings in pension and insurance or increasing the threshold under Section 80C, in turn would mobilize resources for infrastructure spending.
Given the challenges in food and fertilizer that the world witnessed due to the geo-political crisis, the budget might place emphasis on these two areas as well. In the agriculture sector, incentives for investing in post-harvest material handling and processing, improved farming practices associated with organic farming and adopting sustainable agricultural practices to lower carbon emissions could be the focus areas.
Farmers in 2021 as well as 2022 had suffered huge losses owing to the skyrocketing fertilizer prices driven by the Russia Ukraine war. Given India’s dependence on imports for fertilizers and the huge subsidies that had to be given to farmers in 2023, more reforms are required in the sector. The government could formulate appropriate incentives for using conventional fertilizers with viable bio-fertilizers, encourage practices that rationalize use of fertilizers and promote best practices and newer technologies.
Quality of infrastructure spending given fiscal consolidation: To commit to more capex amidst fiscal consolidation would require the government to identify and rationalize some of the non-priority spending. We expect Centre to continue to allocate long-term capex funds for states. While the government had announced Rs 1 trillion, 50-year, interest-free capex loans to states in the last Union Budget, it is important to nudge states to increase their capital spending. While 20% of the above fund was linked to state reforms, the government could similarly earmark a section of the fund allocated in 2023-24 towards spending on green infrastructure.
Ensure macroeconomic stability
Given the heightened uncertainty and the myriad of external shocks that the economy is facing currently, ensuring macroeconomic stability would be critical. To ensure macroeconomic stability and bring the growth rate back to the pre-pandemic growth path, adhering to the fiscal deficit target and staying on the glide path will be imperative. However, it would be crucial to maintain fiscal prudence without constricting growth as global risks persist. We thus expect the government not only to announce some concrete measures to brace the economy from the imminent global slowdown but also to lay down the blueprint of its growth strategy for this decade. The right policy decisions could curve a turning point for the economy at this time.
Dr. Arun Singh is Global Chief Economist, Dun & Bradstreet India
The government has to manage the fine balance between fiscal prudence while ensuring productive expenditure, announcing growth promoting measures, creating jobs, supporting troubled MSMEs, providing social support to masses, focusing on green energy and continue the infrastructure push. Importantly, there is a need to create appropriate support mechanism in the event of significant global slowdown while managing fiscal challenges. Thus, while there will be many priorities for government in this Budget, few are important to mention.
Thrust on self-reliant India to create more jobs: When countries are moving towards diversifying their supply chains, India should strongly focus on creating opportunities to attract investor’s interest. We expect the government to extend the PLI schemes to new sectors such as electricity storage systems, solar cells and modules, aircraft including UAVs, AI, robotics and automation etc. Besides, accelerating efforts towards one district one product (OPOP) scheme and linking this to create export hubs and developing organised market for traditional products would create growth centres, promoting self -reliance, thereby supporting the rural economy. This would also help in creating jobs.
Support to troubled MSMEs – the biggest job creator
Even as MSMEs are yet to recover from the twin shocks – Covid-19 pandemic and the Russia-Ukraine crisis – they have been hit by a third shock, monetary tightening. Rising interest rates and elevated input costs are hurting their investment plan and bottom-line growth, respectively. On the other hand, the cost-of-living crisis continues to weigh on consumer confidence and demand for goods and services, hurting their top-line growth. In this context, government should continue to provide support to MSMEs.
Given that interest rates are increasing rapidly, support under Interest Equalization Scheme should be restored to 5% for manufacturer MSMEs and to 3% for merchant exporters. The scheme should also be extended to the services sector. Exporters should be provided automatic enhancement in credit limit by 25% without the need of collateral. Further, the pre-shipment credit in foreign currency should have a ceiling of London Interbank Offer Rate (LIBOR) +200 basis points.
Since 2018, import tariffs for several product categories have been raised. All such protection should be accompanied with a ‘sunset’ clause and the government should gradually phase out of import tariff. This will improve the competitiveness of domestic MSMEs. Interlinking of Foreign Trade Policy with Foreign Direct Investment and industrial policies will play a significant role in increasing India’s share of high value-added technology-intensive exports. The One District One Product concept needs to be supported by sufficient infrastructure by the District Industries Centers. The government should also facilitate cross border e-commerce and provide the same benefits as applicable to conventional exports. A target should be set to increase the share of e-commerce retail exports to 10% of merchandise exports by 2027.
The Remission of Duties and Taxes on Export Products (RoDTEP) scheme should be expanded to cover the remaining sectors (specifically the remaining chapters of HS code). There should also be no capping on the rates so as to effectively eliminate the incidence of taxes including embedded taxes, not refunded through GST and other mechanism. RoDTEP should also be extended to Export Oriented Units (EOUs), Special Economic Zone (SEZ), and Advance/ Duty Free Import Authorization holders.
Focus on climate change and energy transition for sustainable growth:
Given the commitment to achieve net zero by 2070 at the COP27 summit in 2022, the government can initiate a discussion of imposing a green tax in the Union Budget. This would send out a positive signal to the global investors especially in the developed markets. On the other hand, the government can also formulate incentives to lure global and domestic investors for green financing, especially, in infrastructure which will also establish India’s credibility in its efforts towards achieving its climate change target. There could be renewed focus to increase the pace of energy transition in the Budget.
Support to masses impacted by three years of crisis
Incentivizing savings of households to brace for an extended period of slowdown such as providing tax incentives for savings in pension and insurance or increasing the threshold under Section 80C, in turn would mobilize resources for infrastructure spending.
Given the challenges in food and fertilizer that the world witnessed due to the geo-political crisis, the budget might place emphasis on these two areas as well. In the agriculture sector, incentives for investing in post-harvest material handling and processing, improved farming practices associated with organic farming and adopting sustainable agricultural practices to lower carbon emissions could be the focus areas.
Farmers in 2021 as well as 2022 had suffered huge losses owing to the skyrocketing fertilizer prices driven by the Russia Ukraine war. Given India’s dependence on imports for fertilizers and the huge subsidies that had to be given to farmers in 2023, more reforms are required in the sector. The government could formulate appropriate incentives for using conventional fertilizers with viable bio-fertilizers, encourage practices that rationalize use of fertilizers and promote best practices and newer technologies.
Quality of infrastructure spending given fiscal consolidation: To commit to more capex amidst fiscal consolidation would require the government to identify and rationalize some of the non-priority spending. We expect Centre to continue to allocate long-term capex funds for states. While the government had announced Rs 1 trillion, 50-year, interest-free capex loans to states in the last Union Budget, it is important to nudge states to increase their capital spending. While 20% of the above fund was linked to state reforms, the government could similarly earmark a section of the fund allocated in 2023-24 towards spending on green infrastructure.
Ensure macroeconomic stability
Given the heightened uncertainty and the myriad of external shocks that the economy is facing currently, ensuring macroeconomic stability would be critical. To ensure macroeconomic stability and bring the growth rate back to the pre-pandemic growth path, adhering to the fiscal deficit target and staying on the glide path will be imperative. However, it would be crucial to maintain fiscal prudence without constricting growth as global risks persist. We thus expect the government not only to announce some concrete measures to brace the economy from the imminent global slowdown but also to lay down the blueprint of its growth strategy for this decade. The right policy decisions could curve a turning point for the economy at this time.
Dr. Arun Singh is Global Chief Economist, Dun & Bradstreet India
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