Union Budget 2021: Economic recovery may be on way but govt measures, effectiveness crucial

Government needs to increase spending to ensure quick rebound of the economy.

Hit by COVID-19 , economies across the globe are discovering their road to recovery and India is no exception. Recent data and business signals suggest that economic recovery may be on the way and the role of government measures and effectiveness are going to be crucial to support the nascent recovery. According to a survey conducted by Deloitte, there is a lot of optimism among industries about the economic outlook and close to 60 percent of the respondents have found government initiatives post-the pandemic helpful.

While all eyes are on Union Budget 2021, we expect the government to focus on five key issues:

The primary focus will likely be on building a stronger foundation, i.e., social and physical infrastructure, to build resilience and better prepare for future uncertainties. In addition, the success of several recent schemes and reforms, including the Atmanirbhar Bharat initiative that the survey respondents have found very impactful, will depend on the scale and quality of infrastructure that India has to build rapidly.

In general, infrastructure is one area where India needs to scale up significantly to compete with its peers globally. The country should also allocate at least 4−6 percent gross domestic product (GDP) in the near-term towards building productive assets, such as road, power, ports, communications, and water infrastructure.  Allocation towards health care infrastructure should be higher (from the current 3.5 percent GDP to at least 5 percent this year) and reach the world average of 10 percent over the next 10 years. The government should also ensure access to loans, land, and facilities to rural and suburban hospitals and improved healthcare services.

The second important focus will likely be on improving the doing business environment and enabling the ecosystem to be competitive. The government may target rationalising the tax structure (change the GST rate structure and ease compliance requirements), investing in improving logistics; allocating resources to ensure social and health protection to workers, inclusion, and better implementation of labour and land laws; and spending on digitisation to improve product market and factor market efficiencies. Amongst various announcements targeted towards MSMEs, a few of them may focus on scaling up facilities through incentives and improving linkages between domestic MSMEs and larger foreign and domestic firms.

The world is witnessing a prominent shift in global supply chains that presents India an opportunity to step up its position in the global value chain. The third emphasis will be on tax incentives and mechanisms to facilitate trade, subsidised credit, and specific programmes for targeted industries. The government may promote specialisation and investment in specific labour-intensive sectors where India has a competitive advantage. Production-linked incentives, which is an impactful initiative for the manufacturing sector, should be associated with the creation of domestic value addition and high value-adding operations.

In order to enable the above three, the fourth focus would be on encouraging technological innovation, promoting competition, protecting consumers, and focusing on skill development. While India may have to target specialising in labour-intensive industries, it has to ensure that it does not get locked in low-skilled and low value-added activities. Human resources play an important role in participation in the gross value chain (GVC). India has to invest in specialised education and targeted training to upskill its working and youth population.

R and D and technological innovation are the other investment areas that the government must focus on to improve quality, reliability, and sophistication of goods and services traded. This is also evident from the survey findings where incentives for R&D have been rated as the top expectation from Atmanirbhar Bharat mission. Reintroducing weighted deduction for R and D expenditures; bringing R and D players within the fold of the reduced tax regime or extending incentives for R and D; and improving the patent box regime to offer reduced tax-rates to assignees/transferees of the patent may help attract industry players to invest in more innovation, contract R and D, and human resources.

Last, but not the least, the government will have to address challenges associated with sustainable finance. There is a need to infuse more capital, experience, expertise, and ensure healthy competition within the Indian banking sector. These could be done by granting licences to large corporate and industrial houses/NBFCs (which is being evaluated by the RBI), subject to a strong regulatory, independent, and governance framework. To improve market financing conditions, policy interventions may be needed to ensure credits/funds flow to NBFCs and HFCs, with concrete credit backstop measures to minimise systemic risks.

The writer is Economist, Deloitte India.