Stimulating growth through a slew of business friendly policies.

It is nearly impossible to balance the expectations of a population of 1.3 billion, and yet, the Finance Minister seeks to do that every year during the presentation of the Union Budget. People ranging from professionals and businessmen to housewives and industry leaders expect the budget to take cognizance of their needs. Budget 2020 is significant as it will be presented in the backdrop of slowing economic growth and rising inflation. Finance Minister Nirmala Sitharaman has the unenviable task of reviving growth in India without additional spending. The objective can be achieved by stimulating industrial growth, which will require a slew of business-friendly policies.

Labour-intensive Sectors

The government already set the ball rolling in September with a cut in corporate tax rates. Corporate tax rates were slashed to 22% from 30% for existing companies and to 15% from 25% for new manufacturing companies. While the jury is still out on the impact of the tax cut, the government can use budget 2020 to build upon the goodwill. The disruption in global supply chains due to the US-China trade war has presented India with a golden opportunity. Lower corporate tax coupled with targeted benefits to specific sectors can help India replace China in certain sectors. The apparel manufacturing sector can be made one of the beneficiaries of the budget as it has the potential to boost job creation as well as exports. Moreover, the bulk of manufacturers leaving China have gone to Vietnam or Bangladesh. The government should try to reverse the trend through new policies in the union budget.  

Hi-tech Manufacturing

With an aim to reduce imports and promote integrated manufacturing, budget 2020 should provide a thrust to the hi-tech manufacturing sector. The union budget can be used to attract manufacturers of semiconductors and microprocessors to India by announcing a scheme to provide production-linked benefits to them. Additionally, manufacturers of photovoltaic cells, lithium-ion batteries, computers and servers can be given tax incentives in the budget 2020. 

India became the second-largest smartphone manufacturer in the world backed by the ‘Make in India’ scheme. The number of smartphone manufacturing units jumped from 2 in 2014 to 268 in 2018. However, most plants assemble imported parts rather than manufacture domestically. New policies should be aimed at pulling global semiconductor and microprocessor manufacturers into India. Investment-linked tax benefits should also be provided in the Budget 2020 for the broader ‘Make in India’ plan. It will incentivize new as well as existing manufacturers.

Capital Markets

Along with the direct steps, the government can take several indirect business-friendly measures to revive growth in India. The government should abolish the long-term capital gains tax and the dividend distribution tax or DDT in the budget 2020. Though it will be negative for government revenues, lower taxes will increase the availability of funds for the industry. If complete removal of both the taxes is not possible, the government should abolish the long-term capital gains tax on property sales and increase the LTCG on shares to 24 months from 12 months currently. Removal of LTCG on property sales could provide a fillip to the real estate sector. Similarly, DDT can be left untouched, but the liability should be shifted to investors from companies. Currently, companies have to pay DDT at an effective rate of 20.56% if they choose to distribute dividends.

Credit Boost

India is a consumption-driven economy, with nearly 60% of the GDP dependent on consumption. Since most domestic industries rely on consumption growth, any policy that revives consumption will be positive for businesses. The government can start with unclogging credit flow by announcing business-friendly policies for NBFCs. The government should come out with a policy on the lines of the Troubled Assets Relief Program. A dedicated fund should be set up to purchase illiquid or difficult-to-value assets from NBFCs and provide them with more headroom for lending. Resumption of lending by NBFCs and banks will revitalize consumption and revive growth in India. It will also lead to the easy availability of funds for small businesses and the real estate sector, which are reeling under a severe slowdown.

Income Tax Cuts

Apart from all the industry-specific policy announcements in the budget 2020, the biggest boost to businesses can be provided by reducing personal income tax rates. The government should at least accept certain parts of the report submitted by the task force on direct tax reforms constituted in 2017. If the suggestions are accepted, people with an annual income between Rs 2.5 lakhs and Rs 10 lakhs will be taxed at 10%. It will reduce the tax burden on people with an annual income of Rs 5 lakh-Rs 10 lakh from 20% to 10%. Similarly, the tax burden on people with an annual income of Rs 10 lakh-20 lakh will come down to 20% from 30%. With the tax cuts, the government can target the middle and upper-middle-class, as they have substantial consumption capacity.

Conclusion

No policy can single-handedly revive growth in India. With subdued revenues, the government will have to prioritize sectors and consumer segments to ensure efficiency in resource allocation. 

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