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Can We Expect An Innovative Budget?
Boosting automobile industry by GST cuts and promoting hybrid and Electric Vehicles, boosting construction industry by suitable tax rate cuts, massively promoting self-redevelopment through loan melas for stalled projects and rationalising tax structures are al good ideas for the coming Budget.
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Our GDP contracted to 5.8 % YoY in Mar 2019, following a growth of 6.6 % in the previous quarter. Real GDP Growth YoY data, from Jun 2005 to Mar 2019, averaged at the rate of 7.6%. 2020 saw a massive fall in GDP due to the pandemic. A Post Covid Budget is due on the 1st of February. What must we expect?
‘Balanced money’ or the 50-20-30 formula divided between needs, savings and wants or ‘Cash only’ budgeting where only cash and no plastic is used or ‘Zero based’ budget where the available money matches exactly the needs or the ‘60% budget’ where 60% goes for committed expenses and rest for others or the ‘No Budget’ Budget where the attention is only on what is left after spending or ‘Values based’ budget where the entire spend is based on important values based on ideologies or ‘Creating one’s own’ budget which is a kind of hybrid model are all innovative budget models. The question however is which one will be innovative enough post Covid?
The lockdown measures affected economy in various sectors resulting in job losses and bankruptcies in the country. The RBI and the government reacted with various monetary and fiscal measures to contain the economic fallout. Further, the government did spend on health and medical resources, keeping people employed, subsidising MSMEs, public investment and also foregone revenues. Did they mitigate the stress? The credit crunch resulted in a negative multiplier effect resulting in rise in unemployment and a fall in construction activity.
The government even deferred certain payments like taxes. It might improve liquidity of individuals and companies in the short term. Beyond new spending measures, the government may have to postpone or cancel some earlier planned expenditures and will still need to provide the fiscal push by accelerating spending and working to achieve a ‘Z’ shaped recovery. That will be the greatest tribute to the ‘Atmanirbharta’ Push.
The Government is most stable and hence can provide economic and political stability which can boost economic activity. It can influence the rate of economic growth by adopting an expansionary fiscal policy, cutting taxes to increase disposable income and encourage spending. However, lowering taxes may increase the budget deficit leading to higher borrowing. Expansionary fiscal policy like cutting interest rates is most appropriate in the current scenario. It can boost domestic demand. Though RBI has done some of it, a little more can be done.
Investment is the only option for sustainable economic growth. It is influenced by Aggregate Demand and Aggregate Supply. Aggregate Demand will rise due to consumer spending, achieve investment levels, government spending and by promoting exports-imports whereas the Aggregate Supply is influenced by productive capacity, efficiency of economy and labour productivity.
Aggregate Demand can rise by lowering interest rates, reducing cost of borrowing, increasing consumer spending and investment, by stimulating higher global growth through exports and imports, increasing domestic demand thereby creating a rise in wealth. Boosting automobile industry by GST cuts and promoting hybrid and Electric Vehicles, boosting construction industry by suitable tax rate cuts, massively promoting self-redevelopment through loan melas for stalled projects and rationalising tax structures are al good ideas for the coming Budget.
Aggregate supply can be raised only when productive capacity rises. The government will do well to invest in development of new technologies like AI, ML, Blockchain, cloud technology and others so their benefits reach the last mile. The current digital push must be given an even bigger push. Introduction of new management techniques, rationalisation of labour laws, improved skills and qualification, institutionalisation of skills within schools and impart of competency based employable skills for people with no formal education, adopting flexible working practices like working from home, creating more opportunities for self-employment, raising retirement age and increasing public sector investment are all the ‘DO’ things this fiscal that will write a great Atmanirbharta story. That story can only be operationalised by majorly, developing Manufacturing, Infrastructure, Surface, Air and Water transportation, Defence and Agriculture sectors.
We are the second lowest cost manufacturing destination globally even lower to China. However, competitiveness on “within the factory gate costs" is offset by the total cost of doing business. It must be set right. Time and cost escalation due to long gestation periods for capital projects, complex procedures and compliances are all real. Process optimisation must be built. We must focus on reducing skill gaps. With product life cycles reducing by up to half, investments in innovation and R&D for long-term competitiveness must be made available. Our MSME’s account for half of the manufacturing output and over 40% of the exports. This sector is in distress, with defaults among the highest across all credit classes. They can be revitalised to account for over 50% of the GDP and employment by focussing on innovation and efficiency. Apprenticeship model supported by collaboration with local universities and tailor-made financing schemes must be instituted. Large-scale investment in infrastructure to build highways, expand the capacity of the rail network and building ports must be made. Inland waterways tor reducing cost of transportation must be developed. Technology must be leveraged and procedures simplified to reduce the cost of doing business.
Investments in Infrastructure can boost GDP by at least 1% to 2% every year besides creating jobs. Physical infrastructure must be built by both public and private investments. Different PPP models must be explored. Foreign players must be encouraged to invest in Infra Projects. Besides contributing to the local expertise, they also help in expanding businesses outside the country, which in turn help FDI inflows. The Skill India mission must be strengthened to reduce skill gaps since skilled labour must come from within. Some chronic problems like projects halting before time, low investments, difficult business environment, unskilled labour market, corporate financing problems, and higher credit risks for public banks curbing new loans must all be effectively addressed. Delays in project implementation only raise interest rates. Massive automation and digital push must address these concerns.
Within the Defence sector, we must improve R&D, create a network of National Laboratories and Universities, facilitate investments, draw effective plans, and timelines for execution and offer better incentives. The public sector needs strengthening. Our DPSUs and OFs face competition from the private sector on productivity, resources and capacity utilization. These need to be facilitated. Corporatization of Ordnance Factories calls for immediate implementation.
The Agricultural sector has been in the news for several months now with the farmers seeking withdrawal of the three laws and the government explaining their benefits. As much as saying that agricultural reforms are required, a discussion with all stake holders too is required if their implementation is to be trouble free. The government, in order to mitigate the farmer distress, must improve lending with lower interest rates, promote use of technology, introduce cluster land bank concept, create cold storage infrastructure in land banks, promote drip irrigation techniques, water conservation, high yielding hybrids, organic farming, cattle conservation and ‘Farm to Home’ Concept.
Ayn Rand had once said: “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” Can we expect the driver to deliver an innovative Post Covid Budget?
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.