Union Budget 2022-23: Setting The Stage For A Decade Of Sustained Growth
The 2021 Union Budget attempted to kickstart fiscal expansion and demand generation despite the limited fiscal latitude and some of its promises are being delivered including setting up an Asset Reconstruction Company, simplifying taxation for senior citizens, and providing clean drinking water.
In 2022, as the government balances the need for aggressive economic growth (8-9%) with consolidation—while containing fiscal debt—it is a lot better off, with excess liquidity, low-interest rates, and a record GST collection (25% year-on-year growth to Rs. 1.3 trillion in November 2021). But room for fiscal maneuvering may shrink in the next few quarters as the US Federal Reserve raises interest rates and the RBI steps in to contain inflation. That’s why it is critical to double down on some strategic investment themes that would propel the economy forward.
First, the government should continue its push to create hard and soft assets by prioritizing education, healthcare, and infrastructure. Government should spend significantly on quality and infrastructure upgrades in primary education while incentivizing expenditure on education through secondary benefits. The need for private sector investment in academic R&D is especially important given the government’s receding budget allocations.
Real expenditure on healthcare has remained much below the targeted 1.5% of GDP. The acute health crisis in rural India during the second COVID-19 wave underscores the need for extensive expansion and upgrade of healthcare infrastructure there. There are opportunities to leverage innovative financing models like social impact bonds or result-linked financing that have worked in some parts of India and globally. This could be combined with encouraging beyond-hospital care models for effective resource utilization.
Alongside, there is an increasing need for focused investments in logistics infrastructure for better integration with global supply chains. Investing in ports, airports, railways, etc., is crucial to boost India’s export economy.
Second, the government needs to encourage export-oriented, labor-intensive manufacturing in sectors such as apparel, food processing, chemicals, textile, leather, wood and furniture. These sectors in India continue to be dominated by the unorganized segment with small enterprises unable to achieve economies of scale to be globally competitive. The budget should focus on incentivising SEZ development and investment in these sectors, linked to PLIs. Additionally, the government needs to allocate funds for schemes like Remission of Duties and Taxes on Exported Products to create a positive export ecosystem. Indian export-oriented manufacturing must act fast to take advantage of the gaps left by China in the global value chain as well as attract to India those firms seeking a China plus-one location.
Third, the government should use the budget to catalyse the net zero movement. As the government gears up to meet the ‘net-zero emissions by 2070’ pledge made at COP26, seeks to reduce reliance on fossil fuels and harnesses the power of water, solar and wind, a critical area of investment is green hydrogen. Green hydrogen has a myriad of domestic, commercial, and industrial uses including electrification of heavy-duty, long-haul transportation. The launch of the National Hydrogen Mission and various green hydrogen pilot projects are steps in the right direction. They must be followed by more clarity on strategies to spur demand, blending green hydrogen with piped natural gas, indigenous manufacturing, and pilot projects for technology demonstration.
Budget 2022 could incentivise investments in a green hydrogen ecosystem through capital subsidies for companies setting up Infrastructure, a tax deduction for R&D, land at concessional rates, and debt funding at an attractive interest rate.
Fourth, Budget 2022 should deepen the start-up ecosystem in India. 2021 was an extraordinary year for this sector in India, with start-up ecosystems raising over USD 24 billion, double the pre-Covid level, primed by abundant liquidity and a changing digital landscape. A budget impetus is critical to help sustain the momentum in a sector with the potential to create large-scale employment.
An option is to encourage the participation of large domestic institutional investors such as LIC, pension funds, mutual funds, and AIFs in the capital raising of start-ups. In addition, the Emergency Credit Line Guarantee Scheme (ECLGS) could be extended due to the disruption caused by the Omicron variant.
The contentious issue of Angel Tax also needs reconsideration. Despite exceptions offered in Budget 2019, less than 10% of start-ups have gained exemption over the past two years. Faster approvals for start-ups, relaxation of certain conditions under the Income Tax regulations, and shortening the defined timelines would do much to reduce the tax impact.
As the global economy enters a phase of high inflation and constrained liquidity, using this year’s fiscal latitude to make these four targeted investments will ensure AtmaNirbhar Bharat in more ways than one.
With inputs from Utsav Patodia, Mayuresh Wagh, Arunabh Podder, and Harsha Potluri
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