Union Budget 2023: An opportunity to boost investment and consumption

Easing of norms to set up and run enterprises will attract investments in a big way; however, the govt should also ensure that populist measures in the budget don't hamper economic growth

The Budget session of the Indian Parliament will be held between January 31 and April 6. There are several discussions and opinions about what should be and what is in the Budget. The Budget comes amid significant developments globally over the past few years. The global economic crisis stemming from Covid-19 and the disruption of global supply chains on account of the Ukraine-Russia war have brought both hardships and opportunities for India.The possibility of a global recession in 2023 adds to the importance of the Budget.

A key aspect the budget should look at is attracting investment. Private investments must increase in order to boost the economy. Capital investment is needed for a desired level of economic growth. The disruption of global supply chains offers opportunities for India to tap potential investments from various countries. The discussion on China+1 or just plus-one strategy has been going on for close to a decade now, but has been more vigorous after the pandemic. The criticality of global supply chains has made countries rethink how much value addition should be done in locations they can rely on. The easing of norms to set up and run businesses will go a long way in ensuring that investments flow into India.

India has moved up the World Bank’s Ease-of-Doing-Business ranking over the years due to the introduction of reforms and the cutting down of a lot of red tape. The 2022 budget eliminated about 75,000 compliances and repealed close to 1,500 union laws in order to make it easier for businesses to function, yet there are many policy changes that are desired. MSMEs are a significant part of the Indian economy and would benefit with more reforms. Many large manufacturers choose to outsource some work to MSMEs instead of doing it inhouse, so easing of norms at this level will have a positive cascading effect.

India’s commitment to IPCC to have net-zero carbon emissions by 2070 would be beneficial if a long-term perspective is taken on different environmental aspects.The promotion of electric vehicles is a step in this direction. EVs have received budgetary support intermittently over the past few years. FAME (Faster Adoption and Manufacturing of Hybrid and Electric vehicles) was launched in 2015 for development of EVs. The extension of this scheme beyond 2024 would be the right step both from an economic and environmental perspective. Electric vehicles suffer from an inverted duty structure for some components. Elimination of such duties should boost the economy, especially when some of the parts can be made in India.

A similar case of inverted duty structure is seen in other sectors. The duties on raw materials and intermediate inputs will have to be reduced to boost the value addition happening in India. The reduction of such duties would be in line with India’s ‘Make in India’ initiative. The removal of inverted duty structure is not new, and has been done in the past. GST is a prominent example where this sort of structure has been rectified for many commodities. Of course, any reduction in import duties in any sector may also increase competition for the corresponding domestic sector, which typically has more upsides than downsides. Nevertheless, we should take into account the concerns of such sectors while reducing these tariffs. Perhaps, the best opportunities to reduce duties lie in sectors that do not have any capacity now nor are there plans to ramp up capacity in future.

Private consumption forms a major portion of India’s GDP, at more than 50 per cent over the years. A boost to this should insulate India to a large extent from external shocks. A reduction in income taxes should increase the disposable income of households and boost consumption. A set of incentives to help the manufacturing sector ramp up production would be necessary to keep inflation under control. India’s manufacturing sector has been protected to some extent over the years. Automobile manufacturers have been incentivised with lower taxes and high tariff walls, but this has also made them cater to demand only in India.

The budget should balance the supply and demand side of the economy to keep India's growth story intact. The budgets of the past few years haven't disrupted India' growth path. This budget is more significant in that it is likely to be the last full budget before India goes to polls in 2024.

Past full pre-election budgets in India have been largely populist. Leaving subsidies largely untouched did have some impact on fiscal deficit. A few income tax reliefs have historically been doled out to the salaried class. Such budgets also had protectionist measures for some sectors of the economy through higher tariff rates on imports. While there are reasons to believe that the current budget is also likely to be somewhat populist, hopefully it shouldn't have a telling effect on economic growth, which is based on strong fundamentals and vibrant, upwardly mobile businesses.
 

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Karthikeyan Chandramohan is a Research Analyst with Infinite Sum Modelling LLC and Dr Badri Narayanan Gopalakrishnan is former Head of Trade and Commerce at NITI Aayog