Budget 2021: Significant points of convergence and divergence

February 05, 2021 6:15 AM

While the Economic Survey stresses on innovation by the private sector, there is no reflection of incentivising the private sector in the Budget

However, as price of imported parts and components would rise, it would make the final product assembled in India more expensive than its competitors, thus India would lose its price competitiveness and thereby move away from GVC participation.However, as price of imported parts and components would rise, it would make the final product assembled in India more expensive than its competitors, thus India would lose its price competitiveness and thereby move away from GVC participation.

By Garima Dhir

In her speech, India’s FM highlighted that Budget FY22 is unique as it follows a global contraction caused due to Covid-19. To pull the country out of a slowdown, several noteworthy instruments have been laid out in the six pillars of the Budget, along with certain taxation measures. While there were some significant points of convergence, with the government’s view of boosting the economy—increasing infrastructure and healthcare spending, introducing a digital census, and recognising a fiscal deficit of 9.5%—there were also certain points of divergence from India’s long-term growth plan, particularly when seen in the light of the FY21 Economic Survey (ES).

Throughout the budget speech, the FM mentioned how India should strengthen its participation in global value chains (GVCs). “Our Custom Duty Policy should …. [be] helping India get onto global value chain and export better”; “Our manufacturing companies need to become an integral part of global supply chains….”, the FM said. Previous year’s survey also spoke at length about the importance GVC participation. However, this was a significant area of diversion in relation to the measures announced.

In the case of GVCs, countries import certain parts and components, process them and export them for further processing or final assembly. GVCs are typically present in electronics, electrical products, and automobiles. In these set of commodities, we see a rise in customs duty in the budget announcement. For example, exemptions on parts of charges and sub-parts of mobiles have been removed. Certain parts and components of mobiles that earlier attracted zero duty will now have an import tariff of 2.5%, duty on parts of automobiles have also been increased to 2.5%. Further, customs duty on certain auto parts has been increased to a whopping 15%. India’s low labour costs makes it a potential assembly destination. However, as price of imported parts and components would rise, it would make the final product assembled in India more expensive than its competitors, thus India would lose its price competitiveness and thereby move away from GVC participation.

Another significant point of divergence is the “business sector’s” involvement in innovation and R&D. FY21 ES has dedicated an entire chapter on how business sector’s contribution to R&D in India is much lesser than what it ought to be—the Indian government contributes three times more (at 56%) as compared to the top 10 economies in the Global Innovation Index. However, in the Budget, there is no reflection of incentivising the private sector to take on its role here. The fifth pillar on Innovation and R&D mentions several initiatives, all by the public sector.

The last point of divergence pertains to Pillar 6—‘minimum government and maximum governance’. FY21 ES points out that Indian businesses have to face ‘over-regulation’—it takes ~4.5 years for a company, which has all its paperwork in place, to be formally struck off from the records. This is 2-4 times more than the time taken in Germany and the UK. In the Budget, however, there aren’t any substantial initiatives in this regard, except for resolution of contractual disputes and a digital census. The pillar covers many issues but misses out on the on-ground implementation of this idea.

In conclusion, while the budget has proposed many steps in the right direction, there are some areas where it has missed realising its full potential and diverges from its policy stance.

The author is International trade policy expert, PhD, IGIDR. View are personal

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