By Arpita Mukherjee and Nibha Bharti
Union Budget 2021 comes at one of the most difficult times in several decades. With the economy facing one of the worst crises since Independence, economic revival, job creation and inclusive growth are the policy priorities for finance minister Nirmala Sitharaman. The budget should align with Prime Minister Narendra Modi’s vision of Atmanirbhar Bharat or self-reliant India, support schemes like production-linked incentive (PLI) scheme, facilitate relocation of firms from countries such as China, help promote exports and link Indian industry with global value chains. All of these need to be achieved with increasing fiscal deficit, with the government playing the role of a facilitator and improving ease of doing business.
Manufacturing has been a key focus area of the Narendra Modi government since it came to power in 2014. The Make in India initiative was launched on September 25, 2014 with action plans for 25 sectors including automobiles, telecommunications, construction and textiles. However, this initiative has not been successful in achieving the desired results.
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Subsequently a number of reform measures including regulatory changes such as the Insolvency and Bankruptcy Code (2016); liberalisation of foreign direct investment (FDI) limits in sectors like defence, coal and air transport; increasing import duties on products such as mobile phones, and implementation of the goods and services tax (GST) followed to help develop manufacturing sector in India. Yet, India failed to catch up with China and ASEAN (the Association of Southeast Asian Nations) countries. Budget 2021 must contain measures to improve the competitiveness of India’s exports.
In 2019-20, the manufacturing sector contributed around 13.6% of India’s gross domestic product (GDP) and accounted for around 20% of the workforce. The Covid-19 outbreak and the lockdown measures to curb its spread slowed the sector by 23.9% in the April-June quarter and 7.5% in the July-September period.
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During the April-August period of calendar year 2020, production of commercial vehicles fell by 87.6%, refrigerators by 72.6%, air conditioners by 84.2%, apparel sector by 55.3% and gems and jewellery by 46.6%. Steel declined by 33%, copper by 26%, coal by 10% and aluminium by 4.8% during the same period. Therefore, reviving manufacturing is one of the focus areas of the government.
Small and medium enterprises (SMEs) that account for over 45% of the industrial output have been the worst impacted by the pandemic, their survival requires the attention of the finance minister. Budget 2021 can take the following five steps to revive the manufacturing sector.
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Budget 2021 must earmark more funds to PLI scheme
The Union Budget 2021 should make provisions to fund the PLI scheme for 13 manufacturing sectors. Since this scheme will mostly benefit large companies, a similar scheme for smaller companies needs to be designed. For SMEs, schemes such as NIRVIK (Niryat Rin Vikas Yojana) scheme was announced in Budget 2020 to provide enhanced insurance cover of up to 90% (from the average of 60%) of the principal and interest, reduce the premium for small exporters in key sectors and simplify procedures for claim and settlement. However, the scheme announced in September has not been implemented till now.
Budget 2021 needs to ensure that targeted schemes, especially for most vulnerable groups like SMEs, are implemented in a time-bound manner. Since India lost the export subsidy case against the US at the World Trade Organization (WTO) in 2019, the subsidies given must be WTO-complaint and incentives under Budget 2021 have to be aligned with other policy initiatives such as the forthcoming Foreign Trade Policy that is due to be released in April 2021.
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Ease of doing business focus area for Budget 2021
India’s rank in the World Bank’s Ease of Doing Business index improved from 77 in 2018 to 63 in 2019. India had a rank of 115 in “paying taxes” in 2019 that is too low. There is a need to streamline both direct and indirect taxes. New companies incorporated on or after October 1, 2019 making fresh investment in manufacturing have been given an option to pay income-tax at the rate of 15% (the effective tax rate for these companies is 17% — 15% tax, plus surcharge at 10% and cess at 4%) through a new provision in the Income Tax Act with effect from 2019-20.
Such companies are exempted from the requirement to pay the minimum alternate tax. This benefit is available to companies that do not avail any exemption/incentive and commences their production on or before March 31, 2023. This incentive may be extended to foreign firms as India investing in manufacturing sector. Since consumer demand is low, sectors such as automobile and consumer goods are looking forward to lower GST rates to help revive consumer demand.
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Sops to technology upgradation and digitisation
Companies need to adopt technology, digital marketing and automation, Budget 2021 may offer incentives for digital adoption and technology upgradation. Incentives may be provided for upgrading quality and standards for products like processed food and PPE (personal protective equipment) kits. India hardly produced PPE kits prior to the lockdown. However, during the lockdown, production of PPE kit started and India now produces around 450,000 PPE kits per day.
The country is ready to export PPEs, but is unable to meet the quality standards in key markets such as the US, European Union (EU) and the UK. Incentives can be given to help upgrade and meet quality standards for exports. Again, while India is a major exporter of food and has a positive trade balance in this sector, the country is not able to export processed food. It is losing its marketshare in developing countries. It is also unable to diversify its exports basket in horticulture and other high-value produce, as there are issues related to food safety and quality standards. Budget 2021 can allocate funds for education, training, improving food safety and quality standards and to make Indian businesses exports ready.
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Diversification of exports and markets
Budget 2021 must allocate funds for research and development within manufacturing, which is limited at present. There is a need to identify new products, new export markets for products and diversify product exports in existing export markets. As the global economy recovers in 2021-22, India should focus on enhancing exports and getting integrated into global value chains.
Attract FDI in key sectors
India is trying to attract foreign investment and has liberalised the foreign investment regime in a number of sectors. This along with incentives such as PLI can help towards development of global value chains. A survey conducted by the authors found that foreign manufacturers would first like to import and test market their products before establishing a presence in manufacturing. In this context, they are facing several issues. There are sudden increases in tariffs and sporadic import restrictions, especially focusing on imports from China even if that is of a European or American company.
While the respondents of the survey support the drive towards self-reliance, several imported products are not produced in India and it will take time to start production here. If there are delays in customs clearances, they are unable to meet customer demand. They have to re-route the product through a third country, which means higher cost.
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A number of foreign manufacturers in sectors like organic food want to try out their products in India, but there is a ban imposed by Food Safety and Standards Authority of India (FSSAI) on imports of such products. Therefore, they are shifting the manufacturing to ASEAN countries, which have recently signed Regional Comprehensive Economic Partnership (RCEP) and can offer a smooth and predictable trade environment.
Budget 2021 needs to reassure trading partners and the private sector. It should take into account the fact that certain imported raw materials are needed for domestic production and exports. The pharma industry is facing a shortage of critical inputs and medicines as China-originated consignments are stuck at the port of entry, resulting in heavy demurrage charges, and delays in production of medicines.
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India’s top two exports, namely, mineral fuels (share was 13.78% in 2019) and natural, precious and semi-precious stones and imitation jewellery (11.36% in 2019) are highly dependent on imports, which accounted for 31.88% and 12.30% respectively of total imports in 2019. Another example is the import restrictions on steel. Under the Custom (Administration of Rules of Origin under Trade Agreement) Rules (CAROTAR, September 2020), importers claiming a preferential rate of duty under respective trade agreements must provide additional origination criteria in addition to a certificate of origin.
India has imposed an anti-dumping duty on flat rolled steel products that are plated or coated with alloy of aluminium and zinc originating from China. The duty is in the range of $13.07-$173.10 per tonne for 5 years. The Directorate General of Foreign Trade Notification No. 33, dated September 28, 2020, requires importers to register in the online system – Steel Import Monitoring System (SIMS) for iron and steel, and the registration number will have to be entered for clearance of the consignment by customs. The registration fee is Rs 1 per thousand (subject to a minimum of Rs 500) and a maximum of Rs 0.1 million on aggregate cost, insurance and freight value of imports.
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Because of these strict import controls, the price of steel in India has increased by 50% while the rise has been around 20% globally, say the respondents of the survey. Some companies have increased steel prices by Rs 1,000-2,400 per tonne in January 2021 and it is estimated that the price will rise further. This has adversely affected the competitiveness of SME engineering goods manufacturers for whom steel is a crucial input.
Overall, the finance minister needs to rationalise taxes and import duties in Budget 2021, ensuring trade facilitation and reduction in trade costs. This will help India’s manufacturing sector to grow, become Atmanirbhar, and integrate into global value chains.
(Arpita Mukherjee is Professor and Research Assistant respectively at the Indian Council for Research on International Economic Relations (ICRIER). Nibha Bharti is a Research Assistant at ICRIER. Views expressed are personal.)