The Finance Minister’s main objective in the Budget was to sustain an 8 per cent plus GDP growth rate in the medium term so that the government realises its vision of becoming a $5 trillion economy at least by 2026-27. In this endeavour, the FM has focussed on how to vitalise the three engines of growth — consumption, investment and exports. The Covid crisis badly affected both private investment and private consumption. The government therefore has placed its faith in ramping up capital investment on its own steam (roads, rails, ports and green power) and relying on its multiplier effect to boost both output and jobs.

Taking this strategy forward, the Finance Minister has ramped up the capital investment allocation from an outlay ₹5.5-lakh crore in the current year to ₹6.5-lakh crore next year. In addition, the assistance allocation to States for capital investment was also raised from ₹15,000 crore (RE for the current year) to ₹1-lakh crore in the next year. This assistance has been tied to States carrying out power reforms and also carrying out amendment to their urban land laws. Here again there is an attempt to use fiscal assistance to prod States to reforms.

The common refrain in the Finance Minister speech was the reference to the PM GATI Shakti programme which is a platform to bring the Centre, States and various stakeholders involved in a project on a common platform. It is felt that many projects are significantly delayed because there is no common planning.

For example, rail lines are aligned in areas where the State government has local issues. Such a common planning would also help to prepare a multimodal logistics plan. While the infrastructure has been the key part of the growth strategy the government has also recognised the vital role of the export engine.

In fact, the growth experience of countries after the Second World War shows that no country has been able to grow at 7 per cent plus real GDP growth without a 20 per cent plus real growth in exports in dollar terms. With this objective, the government has announced that it would revamp the Special Economic Zone arrangements to incentivise exporters to set up units within the existing zones on ideal land. The government has also promised a light customs regulation consistent with risk parameters. It would focus on vitalising those SEZ units in the coastal region which can immediately be operationalised as was the case in China.

Export thrust missing

Unfortunately, a great opportunity to boost exports through lowering the import tariffs has been lost. All the reputed economists including Arvind Panagriya have pleaded for reduction in import tariffs. The economic rationale being that exports have high import content. No country has demonstrated that it can grow exports while reducing imports. Both grow pari passu.

The former RBI governor D Subbarao recently remarked, “you cannot grow exports behind protectionist walls”. Today, our labour-intensive sectors like leather and footwear are hobbled by high import duties on raw materials and intermediates like fibre, yarn, fabrics, leather chemicals. A recent study by Shoumitro Chatterjee and Arvind Subramanian showed that as a percentage of value added in the textile sector, the value of imports was between 40 and 45 per cent in China and Vietnam during the boom years compared to 16 per cent in India. Therefore, while China and Vietnam exported high value textiles, India’s textile exports were confined to the lower end of the value chain.

One important export-oriented measure that was announced in the Budget was reduced customs duty on wide gamut of products across segments including cut and polished diamond, gemstones, critical chemicals like methanol and acetic acid and inputs required for shrimp aquaculture. To give some relief to the MSME secondary steel producers, the FM extended the customs duty exemption on steel scrap by another year.

In this Budget, the government has shown its inclination to a slow fiscal glide path. Instead of opting for a drastic cut in the fiscal deficit, the fiscal deficit will move from 6.9 percent in the current year to 6.4 percent in the next year and ultimately to 4.5 percent only in 2025-26. This is appropriate for the covid crisis has adversely impacted the poor especially the urban poor. The argument here is that instead of launching any new scheme for the urban poor, it would be better to stimulate the economy and hope that growth can lift many boats. The young and the women have exited the labour force for reasons that are not fully understood. Their increased participation will boost the GDP. The solution probably lies in finding work which women could do from the confines of their homes.

Overall, this is a growth-oriented Budget which seeks to create the right ecosystem for putting the Indian economy on a high growth rate.

Krishnan is National Leader, Tax and Economic Policy Group, and Pathak is Manager, Tax and Economic Policy Group, EY India

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