• Yezdi Nagporewalla, Partner |
4 min read

The Indian economy has shown commendable resilience in the face of the covid pandemic. However, the case for government intervention to drive an inclusive recovery remains strong. The forthcoming Union budget for 2022-23 will need to balance multiple objectives of addressing varied yet urgent needs of the economy. An astute fiscal-stimulus strategy, coupled with a prudent balance of capital and consumption expenditure is the need of the hour.

Recent economic data has shown a K-shaped recovery, with gains concentrated at the top and low-paid workers, farmers and small businesses left behind. With a large portion of the population employed in the informal economy, such rising inequality needs attention. Carefully-crafted policy interventions are needed to prevent the erosion of any pre-pandemic gains made towards reducing economic imbalances.

Persistent high inflation combined with current levels of unemployment and demand, if unaddressed, can pose imminent challenges to sustainable growth. Supply disruptions both global and domestic continue to plague businesses even as the interest rate graph is turning upwards in line with rising inflationary pressures and liquidity normalization measures, increasing the cost of borrowing.

Targeted policy prescriptions along with relentless execution are critical. Last year’s budget was pro-growth, and similar measures must help revive the private sector’s animal spirits. Hence, it is important that India executes growth-and-productivity enhancing reforms effectively. Adhering to global commitments, rationalization of tax provisions, reducing litigation and building investor confidence should be budget priorities.

Key budget expectations include a sustained focus on infrastructure, a renewed ‘Atmanirbhar Bharat’ and export thrust, support for pandemic-hit sectors, the promotion of green energy and generation of jobs and demand via rural and social schemes. Incentivizing and improving the flow of funds to the real estate sector would help nurture employment and increase consumption. Improving digital infrastructure across India and connectivity in rural areas will further help drive growth. Reducing regulatory ambiguity for blockchain, crypto and metaverse ventures will help elevate digital consumption in the country.

Besides disinvestment, the Centre must increase revenue receipts through FDI and asset monetization to cover next year’s fiscal deficit. Tapping healthier revenue- generation avenues at both the central and state levels will create fiscal space to ramp up infrastructure spending. For high-quality expenditure that stimulates consumption, Centre-state coordination and an alignment of fiscal and monetary policies are important. A Centre-State fiscal council, like the GST Council, could deliver results.

The budget is also expected to provide clarity on when the equalization levy will be withdrawn and issue clear guidance on interpretational issues related to this levy to avoid litigation. A realignment of income slabs and tax rates for individuals could also be evaluated. Considering the response to recent dispute resolution schemes, both for direct and indirect taxes, the government could consider introducing a permanent dispute resolution process to enable settlement on a case-by-case basis. This will help the Centre recover revenue locked up in litigation as well as address the pendency of disputes. With the increased scope of at-source tax deduction and collection provisions over the past few years, the practical challenges of compliance faced by taxpayers also need to be addressed.

Research incentives can give a further boost to ‘Make in India’ and ‘Atmanirbhar Bharat’. The government should also consider reinstating the weighted deduction for R&D expenditure at 1.5 to 2 times the spending.

Micro, Small and Medium Enterprises (MSMEs) continue to be the backbone of economic growth. In a bid to boost local manufacturing and promote self-reliance, we could expect the budget to focus on MSME growth as they can support the country’s employment-generation needs. Enabling entrepreneurship is key, and to give India’s startup ecosystem a fillip, the government may look to liberalize the startup regime further in context of tax benefits and eligibility criteria. An emphasis on developing entrepreneurial ecosystems in smaller towns will be imperative. Additionally, relief packages or lower interest rates for startups would be welcome.

Rural demand buoyancy would be driven by higher spending under India’s rural employment-guarantee scheme, as well as continuation of the government’s rural infrastructure spending, which can boost non-farm incomes in villages.

Innovation in green energy is critical to address the growing needs of our emerging economy and this effort needs fiscal and regulatory support. Environment, social and governance (ESG) investments and initiatives by corporates should be incentivized. Lastly, a ‘green budget’ will reaffirm India’s commitment to sustainable development.

As India has one of the world’s fastest growing economies, all eyes are on us. In the words of Prime Minister Narendra Modi at the World Economic Forum’s annual meet this year, India’s growth over the next 25 years should be clean, green, sustainable and reliable. The budget must reflect this commitment.

A version of this article appeared in Mint on 28 January 2022