Budget 2021: Why this budget should aim to up India’s resilience and competitiveness


After a year that had a devastating impact on human and economic capital, India is beginning to show signs of recovery. Growth for 2020-21 is likely to be at (-)7.7%, but, RBI’s forecast for growth in the first half of 2021-22 is an optimistic 6.5% to 21.9%. The vaccine rollout has also given hope that economic activity will resume normalcy soon. With this cautious optimism, the expectations from the Budget are for stepping-up the reforms momentum to stimulate growth and build India’s resilience and competitiveness, in line with the Atmanirbhar Bharat vision.

Government’s fiscal options are significantly constrained with Centre’s gross tax revenues contracting by 12.6% during the first eight months of FY21. Even non-debt capital receipts like disinvestment are far lower than budgeted. However, considering the formidable impact of the pandemic, the government will need to put fiscal consolidation on medium term path and focus on capital expenditure to turnaround the economy. Centre’s capex multiplier is estimated at 3.25, with positive impact on employment, demand and growth for all segments of industry, including small and mid-sized sectors.

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Budget could incentivise private investments into the infrastructure sectors. The National Infrastructure Pipeline envisages an investment of over Rs 111 lakh crore over the period FY20 to FY25, with about one-fifth contribution from the private sector. The last Budget granted exemption from capital gains, interest and dividends to sovereign wealth funds and pension funds, if invested in specified infrastructure activities. Similar incentive may be extended to anyone engaged in the business of developing, maintaining and operating an infrastructure facility who wishes to commit funds for investments in specified sectors, subject to certain conditions in terms of a timeline/ holding period for investments. This will not have any immediate revenue impact but will provide a tremendous boost to businesses keen to invest. At the time when tax benefits will kick in, the investments will have begun to yield returns for both investors and the government.

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Globally, countries have been incentivising research and innovation even while providing a low corporate tax rate. Given the significance of innovation, creation of new products, services and technologies for an economy to remain competitive and self-reliant, India must continue to incentivise R&D. Reintroduction of weighted deduction of 200% for inhouse R&D facility and liberalising the approval process for the same will be a welcome step in the direction of enabling India to build competence and improve quality to be more export competitive.

Certain measures that will not have any major revenue impact may also be considered. Many small and large businesses are likely to restructure to manage the pandemic impact and the tax provisions for business reorganisation process may be made more facilitative. For instance, Government should remove sectoral restrictions under s.72A to allow all sectors including companies owning service and/or trade undertakings to take the benefit of carry forward and set-off of accumulated loss and unabsorbed depreciation allowance. Clarity should also be provided regarding non-applicability of anti-tax avoidance provisions like s.50CA and s.56(2)(x) to bonafide share transfer or new share issue transactions.

Parallel to the policy measures, it is important to focus on the on-ground facilitation reforms. For instance, improving the logistics infrastructure for transportation of goods or expanding port capacity will considerably cut costs and time delays. Similarly, contract enforcement, registering property and starting a business are some areas where India still ranks low among other nations in terms of ease of doing business. World Bank reports that enforcement of contracts takes an average of 1445 days in India, involving a cost of 31% of the claim value. This is dismal compared to other jurisdictions like China (485 days), Australia (402 days), UK (437 days) and Indonesia (390 days). Government must continue its relentless efforts to improve these areas especially when, in the new geo-political environment, global value chains are shifting and seeking new locations.

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The Finance Minister has done a commendable job in handling the monumental COVID crisis through various support measures. The Budget can play a critical role in steering the economy towards full revival by continuing the focus on supportive fiscal policies.

(The writer is Director – Tax Economy and Policy Group, EY)





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