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Union Budget FY22: Good economics must make good politics.

Date: 19-01-2021
Subject: Union Budget FY22: Good economics must make good politics
Union Budget 2021 India: A progressive Budget would send positive signals to overseas investors.

By Jayant Krishna

Indian Union Budget 2021-22: The Narendra Modi government has leveraged the Covid-19 slowdown as an opportunity for transformative reforms previously considered unthinkable, including liberalising agricultural markets, diluting the onslaught of labour laws, credit guarantees for SME loans, and a liberal PLI to stimulate manufacturing. These reforms have created a cautious optimism among investors worldwide awaiting the forthcoming Budget. India’s reforms require further acceleration, and a consensus that good economics makes good politics.

Land acquisition has been an irritant for investors since 2013. Cost of acquiring land has increased substantially. Appropriate amendments must be attempted in the legislation. Tweaking labour laws recently was a stop-gap measure. The government must categorise 44 central laws into compensation, social security, industrial relations, and health and safety—and draft a unified model labour law to replace archaic laws for adoption by states.

India’s trade-to-GDP ratio must improve. High import tariffs promote local products of poorer quality, adversely affecting potentially superior and better-priced products for exports. Having turned away from the RCEP, India needs to conclude trade agreements with the UK and other major economies. Announcing such intent would be welcome.

Effective corporate tax rate for domestic companies is 25.17%, while that for foreign firms is 43.68%. Global practice maintains tax parity across all companies as in BRICS and OECD nations, Hong Kong, and Singapore. With such parity, India will enhance investment attractiveness.

In view of the recent international arbitration rulings, India should discontinue retrospective taxation. The international business community is following India’s response. Accepting the ruling would send positive signals to investors.

Spending on public healthcare needs to rise from 1.3% to 3% of GDP with Covid-19 exposing glaring inadequacies. Revising the National List of Essential Medicines to exempt inexpensively-priced medicines from price controls would help investments in innovation and API manufacturing. Specialised patent benches would help IPR protection, facilitating India’s emergence as pharmacy of the world.

Education and healthcare pull India’s HDI rank down to 131st. If the New Education Policy is to be implemented properly, public spend on education and skill development must rise from 3% to 4.5% of GDP. Indian higher education must embrace globality along with mutual recognition of degrees.

The government must raise defence allocations to over 2.5% of GDP given India’s new threat perceptions, and redress imbalances wherein the capital component of total fiscal allocations for defence could be increased from 34% to 40%. Defence FDI could be raised from 74% to 100% under automatic route.

Developing data adequacy agreements with the UK and other key countries would facilitate cross-border movement of personal data based on a mutual adequacy basis. India’s data protection law requires clear separation of regulatory and enforcement authorities to avoid conflicts.

Bottled-in-origin and bulk spirits attract a high basic customs duty (150%), increasing the price of imported alcoholic beverages, deterring companies eyeing the Indian market, and depriving India of the corresponding FDI. Phased reduction of duty on these products to 75% and finally to 30% is advisable.

As the rationale to maintain FDI in the insurance sector at 49% now holds limited logic, India could increase it to a majority stake or even 100%.

Despite 30 crore active online gamers, some states are contemplating bans. The online gaming industry should be supported by a model law, tax regime and self-regulation so that the government accrues tax revenues estimated at Rs 15,000 crore.

Most countries tax domestic corporate dividends at lower rates and, therefore, FPIs’ dividend income should be taxed at 10%. Foreign banks must be brought at par with Indian banks with 8.5% deduction for NPA provisioning. Excluding financial services from the e-commerce equalisation levy would be appropriate.

PSU disinvestments have slowed, and the Budget needs to announce measures for their acceleration as a privatisation push would be transformative for India in the long run.

As developed countries contemplate relocating their manufacturing supply chains to destinations besides China, a progressive Budget would send positive signals to overseas investors and would propel India’s rightful ambition to be the world’s next manufacturing workshop, in consonance with the Atmanirbhar Bharat vision.


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