In her speech, India’s Finance Minister (FM), Ms. Nirmala Sitharaman, highlighted that Budget FY22 is unique as it follows a global contraction caused due to Covid-19. To pull the country out of a slowdown, several noteworthy instruments have been laid out in the six pillars of the Budget, along with certain taxation measures. While there were some significant points of convergence in the budget, with the government’s own view, the budget at many places was in divergence with the government’s plans for India’s long term, particularly when seen in the light of the Economic Survey 2020-21.
Talking about the point of convergence in this budget, there is the much talked about infrastructure and health spending. As infrastructure sector has massive backward and forward linkages with other sectors of the economy, growth in this sector is expected to not only generate output and employment in the infra sectors but also in other sectors that are used as inputs in the infrastructure sector. For instance, building of a railway line not only creates employment in the railway sector but also in iron and steel, cement, rubber, etc which are used as inputs in its creation. Further, a strong infrastructure, whether it is in terms of roadways, highways, railways, ports and airways, has a second-order impact on businesses as it makes transportation of people and goods easier. The budget projects that the capital expenditure of India would be over ₹5.5 trillion, almost an increase of 25% from the last financial year.
On the health side, the budget draws from the recommendations of the Economic Survey 2021 and we see a 137% rise in health spending as compared to the last year. This was expected and necessary not only given the COVID-19 pandemic but also since the health sector has a cascading impact on human capital in terms of productivity, personal spending (or personal saving resulting from a robust healthcare system) and overall sustainable development of the economy.
The other point of convergence in the budget is a digital census. While this bullet point has a small mention in the budget but this was long pending given the massive importance of data in today’s age and day. This is certainly a step forward in the government’s ‘Digital India’ vision and would reduce the turnaround time taken for the census results to be made public. Next point of conversion is the stand the government has taken on controlling pollution, whether it is in the form of air pollution, water pollution or pollution caused form excessive usage of plastic and improper waste disposal. No doubt, the most endearing part of the budget is the transparency in fiscal deficit that the country will face. Given the current scenario of a slowdown in the Indian Economy, the budget does not shy away from owning up to 9.5% of GDP for the year 2020-21.
Coming to the other side of the table, the biggest area of divergence in the budget is the contradiction in what it says about India’s participation in Global Value Chains (GVCs) and world trade and the measures proposed in the budget. Multiple times throughout the budget speech, the FM mentions how India should strengthen its participation in GVCs – “Our Custom Duty Policy should have the twin objective of promoting domestic manufacturing and helping India get onto global value chain and export better”; “Our manufacturing companies need to become an integral part of global supply chains, possess core competence and cutting-edge technology.” [ Excerpts from FM’s Budget Speech]. Previous year’s Economic Survey also spoke at length about the importance of India’s participation in GVCs and the strategies that the country should adopt.
To understand how the budget is in divergence with this view, it’s important to see how GVCs work. To put it briefly, GVCs are based on the concept of cost minimization, wherein production of a particular product is split across countries. This is done because some countries are able to perform certain tasks at lower prices while for others it might be more expensive to do so. In case of such a production process, countries import certain parts and components, process them and export them for further processing or for final assembly. GVCs are typically present in electronics and electrical products, automobiles.
India being a labour abundant country has low labour costs, which makes assembly related activities cheaper in India to perform. For assembly to take place, parts and components would need to be imported to India and increasing import duty on these parts, would make the final product assembled in India more expensive than its competitors. We see in the budget that custom duties on various parts and components have been increased. For example, exemptions on parts of charges and sub-parts of mobiles have been removed. Further, certain parts and components of mobiles that earlier attracted zero duty will now have an import tariff of 2.5%. Similarly, parts of automobiles have also seen an increase in custom duties, wherein, tunnel boring machines and their parts will attract a duty of 7.5% and 2.5% respectively. Further, customs duty on certain auto parts has been increased to a whopping 15%. As price of imported parts and components would rise, it would push away India from GVC participation as it would lose out on its price competitiveness, making these measures in complete divergence to the government’s vision.
Another significant point of divergence in the budget is on “Business Sector’s” involvement in innovation and R&D. The Economic Survey 2021 has dedicated an entire chapter pointing out how the business sector contribution to R&D in India is much lesser than what it ought to be. As India made it to the top 50 in Global Innovation Index, the Survey discussed how a country the size of India should aspire to be in the top 10 and showed how the Indian government contributes 3 times more (at 56%) as compared to the top 10 economies. In the budget, however, there is no reflection of incentivising private sector to take on its role here. ‘The fifth pillar on ‘Innovation and R&D mentions several initiatives, all by the public sector, thereby leaving the private sector to find its own path.
The last point of divergence pertains to Pillar 6—‘minimum government and maximum governance’. Economic Survey 2020-21 points out that Indian businesses have to face ‘over-regulation’—it takes ~4.5 years for a company, which has all its paperwork in place, to be formally struck off from the records. This is 2-4 times more than the time taken in Germany and the UK. In the Budget, however, there aren’t any substantial initiatives in this regard, except for resolution of contractual disputes and a digital census. The pillar covers many issues but misses out on the on-ground implementation of this idea.
In conclusion, while the budget has proposed many steps in the right direction, there are some areas where it has missed realising its full potential and diverges from its policy stance.
A more concise version of this blog was published in Financial Express on 05 February 2021, under the title ‘Budget 2021 – Significant points of convergence and diversion‘.