Dr Ashwani Mahajan
The Ministry of Finance is preparing for Union Budget 2024 which is to be presented in July. The ministry is already holding consultative meetings with different stakeholders including economists, farmers, NBFCs, market experts and others.
On June 20, a meeting was held with eminent economists who were invited to give their viewpoint about the forthcoming budget. The market mood is upbeat as India records higher GDP growth, a booming manufacturing sector, cooling of inflation, lowering of CPI inflation in April, WPI slumping to in the negative zone and lowering of fiscal deficit than budget estimates. Though the rupee is depreciating, but at a much lower rate of 1.4% in the last fiscal year and current account deficit in balance of payment (BOP) is lower at hardly 0.7% of GDP. In 2023-24, the foreign exchange reserves reached all time high at $665.8 billion by the first week of June, giving more reasons to celebrate.
Now the challenge before Modi 3.0 is to sustain this growth and also address the issue of inflation, especially food inflation and unemployment. The economists present in the room were all appreciative of the government’s fiscal prudence, manufacturing growth and handling of BOP issues. Continuing with fiscal prudence is something which cannot be compromised. This is a precondition to keep inflation under check and push growth. There was a consensus about continuing with lower fiscal deficit. Since the government has already proposed fiscal deficit of 5.1% of GDP in the interim budget 2024-25, there is no reason for the government to deviate from the same.
But there are pressing needs due to which the government may need more funds for capex, especially infrastructure; spending on welfare schemes, including Prime Minister Awaas Yojana; PLI scheme, especially with extension of the same in the new sectors. Moreover, there is also an urgency to address the problem of unemployment, especially among the educated youth.
AI and Jobs: A Case For Robot Tax
Some economists in the room, raised concerns about loss of jobs due to new technology, especially AI. It was agreed that new technology cannot be ignored or avoided but those gaining jobs must compensate those who are at loss, that is, workers who are losing jobs or new entrants in job market, who are not being absorbed.
While referring to the attack on job creation, it was suggested that the possibility of exploring ‘Robot Tax’, which can be used to reskill and rehabilitate workers who are displaced. A paper by IMF has noted that though AI can boost overall employment and wages, it argued that AI can ‘put large swaths of labour force out of work for extended periods making for a painful transition’.
PLI Designed For MSME
Encouraged by the success of first phase of PLI scheme, which helped reduce dependence on China in APIs, defence equipment, mobile phones, electronics and many others, economists favoured the next phase of PLI to be designed around MSME sector. This is important to design PLI scheme for MSME for more balanced industrial development, with an eye on employment generation.
Preparing for Custom Duty on E-Products
It’s understood that as per the outcome of 13th Ministerial Conference of WTO, from 14th Ministerial of WTO, moratorium on custom duty on digital products will end. As a preparation for imposing custom duty on digital products, we can initiate custom duty on digitizable goods with most favoured nation tariff of zero percent on electronic transmissions by creating specific tariff heads in Indian Custom Tariff Manual for software and other digital goods transmitted electronically including operating system software, application software, multimedia, support or Driver Data and other Digital Products. Indonesia has already taken this step. This will facilitate collection of data and imposing custom duty at appropriate rates after 01/04/2026 when moratorium on custom duty of e-transmission, imposed by WTO shall end.
Encouraging Private Investment
No doubt, in the long run, imposition of tariff on e-products will encourage private investment in digital and electronically transmitted products, there is an urgent need to boost investment in several other industries and start-ups. To finance this investment from domestic sources, we need to give conducive atmosphere for domestic investors. To promote private investment, suggestions, talked about in the meeting included:
l Long-term capital gain parity may be introduced between listed, unlisted space to remove friction in flow of Alternative Investment Funds (AIFs). Investments held for more than one year by AIFs are classified as long-term capital gains and accordingly taxed as per the rate applicable to long-term capital gain tax. Long-term capital gains on listed shares are typically taxable at the rate of 10% and on unlisted shares and other assets at the rate of 20%.
l Production-linked incentives (PLI) scheme should be introduced for import substitution from China including organic chemicals, plastic and EV related equipment.
l Industrial parks with Plug and Play facilities, common tool room and R&D facilities may be established in declared defence corridors for small and medium enterprises. ISRO model can be adopted for enhancing defence production at reasonable cost.
l Though, government has made it clear that those returning home must pay the requisite tax and majority of those ‘reverse flipping’ are even ready to pay the same, yet there are some issues related to red-tapism and procedures and tons of paperwork. Since, it’s (reverse flipping) a one-time affair, government may come out with a package for facilitating reverse flipping and reduce inconvenience for those who are returning. This can be a win-win situation for all; be it government revenue, start-up eco system and country as a whole.
l Blended Fund of Funds may be anchored by the government as subordinate mechanism for funding long term innovation.
(The author is a Professor, PGDAV College, University of Delhi)
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