From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Reforms for economic growth
The article suggests the reforms that should be included in the next budget to boost the Indian economy.
Need for further reforms
- Government has leveraged the Covid-19 slowdown as an opportunity for introducing transformative reforms.
- The recently introduced reforms include liberalising agricultural markets, diluting the onslaught of labour laws, credit guarantees for SME loans, and a liberal PLI to stimulate manufacturing.
- These reforms have created a cautious optimism among investors worldwide awaiting the forthcoming Budget.
- India’s reforms require further acceleration, and a consensus that good economics makes good politics.
Reforms required to attract investment
- Cost of acquiring land has increased substantially, which needs to be reduced.
- The government must categorise 44 central laws into compensation, social security, industrial relations, and health and safety—and draft a unified model labour law to replace archaic laws for adoption by states.
- India’s trade-to-GDP ratio must improve.
- Having turned away from the RCEP, India needs to conclude trade agreements with the UK and other major economies. Announcing such intent would be welcome.
- Effective corporate tax rate for domestic companies is 25.17%, while that for foreign firms is 43.68%, India should maintain tax parity across domestic and foreign companies.
- With such parity, India will enhance investment attractiveness.
- In view of the recent international arbitration rulings, India should discontinue retrospective taxation.
- Defence FDI could be raised from 74% to 100% under automatic route.
- The rationale to maintain FDI in the insurance sector at 49% now holds limited logic, India could increase it to a majority stake or even 100%.
- Bottled-in-origin and bulk spirits attract a high basic customs duty (150%), deterring companies eyeing the Indian market, and depriving India of the corresponding FDI.
- Phased reduction of duty on these products to 75% and finally to 30% is advisable.
Areas that need increased spending
- Spending on public healthcare needs to rise from 1.3% to 3% of GDP with Covid-19 exposing glaring inadequacies.
- Revising the National List of Essential Medicines to exempt inexpensively-priced medicines from price controls would help investments in innovation and API manufacturing.
- If the New Education Policy is to be implemented properly, public spend on education and skill development must rise from 3% to 4.5% of GDP.
- The government must raise defence allocations to over 2.5% of GDP given India’s new threat perceptions and increase capital component of total fiscal allocations for defence could be increased from 34% to 40%.
Other measures to boost the economy
- Developing data adequacy agreements with the UK and other key countries would facilitate cross-border movement of personal data based on a mutual adequacy basis.
- The online gaming industry should be supported by a model law, tax regime and self-regulation so that the government accrues tax revenues estimated at Rs 15,000 crore.
- Most countries tax domestic corporate dividends at lower rates and, therefore, FPIs’ dividend income should be taxed at 10%.
- Foreign banks must be brought at par with Indian banks with 8.5% deduction for NPA provisioning.
- Excluding financial services from the e-commerce equalisation levy would be appropriate.
- PSU disinvestments have slowed, and the Budget needs to announce measures for their acceleration as a privatisation push would be transformative for India in the long run.
Consider the question”What are the hurdles in making India the more attractive to the investors? Discuss the measures to make India more attractive for investors.”
As developed countries contemplate relocating their manufacturing supply chains to destinations besides China, a progressive Budget would send positive signals to overseas investors and would propel India’s rightful ambition to be the world’s next manufacturing workshop, in consonance with the Atmanirbhar Bharat vision.