Against the backdrop of a slowing economy, in which smaller enterprises and downstream units have been hit by import restrictions, the government must heed the many voices cautioning against high import duties and other trade barriers that help only large corporations. Concerns have been expressed about how government policies may be creating “local monopolies”. Indeed, the government would do well to review the imposts and import policies on products such as solar panels, polyester, and viscose fibres, and other critical raw materials such as steel, copper, and aluminium. Tweaking the Customs duties on inputs, and correcting any anomalies is important to encourage the manufacture of finished goods in a host of sectors. By lowering import duties and easing other barriers, the government would not be doing the user industries a favour; it would merely be ensuring these businesses operate in a fair environment that will make their operations viable. This has the potential to create job opportunities at a time when larger Indian companies are scaling back on hiring and reining in wage hikes, and unemployment is a problem.
Critically, it would boost local manufacturing and help further India’s China+1 aspirations. Although capacity-building has been meaningful in sectors such green energy, semi-conductors, and electronics goods, the kind of capital commitment expected from the private sector after corporation tax rates were slashed in 2019, simply hasn’t materialised. The government has gone all out to boost investments, rolling out schemes like FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) for electric vehicles. The production-linked investment scheme is a generous one with 75% of the capex tab being picked up by the Centre and the state concerned. Reports in the media to the effect that the government is looking at a new concessional corporate tax scheme for new manufacturing units at 18% (plus cess and surcharge), in the nature of the one that lapsed in 2024, are encouraging.
Investments by the private sector have been sluggish partly because visibility on consumer demand remains hazy, especially with the economy having slowed sharply, and the fact that capacity utilisation is at a fairly high 74-75%. The finance minister has defended the private sector alluding to investments for CBAM — carbon border adjustment mechanism — but the fact is the sharp cut in the corporation tax from 30% to 22% was intended to drive more capex. However, it has been the government that is doing all the heavy-lifting these past few years.
Be that as it may, the current situation — slowing growth, tepid investments, and weak consumption — would call for some counter-cyclical support. The Budget is likely to have income tax sops for middle-income households which are reeling under runaway inflation, and it is possible that, at some point, goods and services tax rates may be eased. But while the Centre and states forgo revenues, companies, for their part, must meet them halfway by lowering prices, and sacrificing margins, to stimulate demand. Again, while credit is not much of a concern for sound projects, interest rates could certainly be lower and the Reserve Bank must reassess its priorities. Also, even as policy rates are cut, the liquidity in the system needs to be adequate at all times. One way the government can help unleash animal spirits, especially of small entrepreneurs, is by slashing the number of clearances and permits required. Red tapism and tax terrorism are throttling the ambitions of many small businessmen who cannot cosy up to the powers that be.