The Union Budget 2022 will be presented by finance minister Nirmala Sitharaman on February 1. Though India’s GDP growth bounced back to 8.4% in the second quarter of the current fiscal year from 7.4% in the same quarter of FY21, it was primarily due to the low-base effect. As the economy was showing signs of recovery, the Omicron variant of Covid-19 emerged as a threat.
The GDP at constant prices in Q2 was at Rs 35.73 lakh crore, 0.33% higher than pre-pandemic levels, indicating the economy has recovered the ground lost due to Covid-19. Aided by increased vaccination, high-contact activities such as restaurants and hotels pushed up the services sector, boosting private consumption.
The manufacturing sector, the prime mover of growth with its backward and forward linkages, managed a growth of 5.5% in the second quarter of the current financial year, compared with a contraction of 1.5% in the same quarter last year. Another positive development was a rise of 1.5% in gross fixed capital formation. In the most unpredictable stock market, investors have seen strong gains this year with Nifty and Sensex moving up by 15% and 20% respectively so far this year.
A challenging task for FM
The government has had a tough time maintaining a healthy economic growth rate amid reports of the Covid-19 third wave. Prime Minister Narendra Modi and the finance minister have been interacting with industry leaders for feedback and suggestions for Budget 2022. In the last couple of years, the government has implemented several schemes offering incentives to manufacturers under the Make in India initiative, the Production Linked Incentives (PLI) scheme, and the GST, aimed at making the Indian manufacturing sector more lucrative for investors.
The change is visible in sectors like electronics manufacturing where India’s share in global manufacturing market increased, but with very little value addition. In the forthcoming budget, the FM needs to widen the coverage of fiscal incentives to sectors under stress and spur growth in potential sectors.
Such incentives not only combat challenges of inflation and unemployment but also act as a catalyst in attracting investments. Since the industrial sector has strong linkages to other segments of the economy including services, it can spur growth in other activities. The budget proposals, in general, need to have the following broad objectives:
- Keeping wholesale price inflation within the comfort zone
- Improving domestic manufacturing to become globally competitive by reducing the inputs and logistics costs
- Job creation in MSME units — prioritising labour-intensive sectors and reducing compliance burden
- Encouragement to green technologies.
Uptick in inflation a concern
The disruptions in global supply chains during the first two waves of the pandemic resulted in raw material/components shortages, rise in their prices, and extended delivery periods. Inflation also rose due to high cost of fuels, power cost, rise in food prices, and low-base effect. The wholesale price index-based inflation rose to 14.23% in November 2021 compared with 12.54% in October and has remained in double digits for the eighth consecutive month. The corresponding rate in November 2020 was 2.29%.
Comparatively, retail inflation for November was at 4.91% despite a recent cut in prices of petroleum products. The WPI for manufactured products which has the highest weightage in overall WPI at 64.23% remained in the range of 11-12% in the last six months which means higher input costs for the manufacturers. A wide gap between WPI and CPI inflation is also indicative of manufacturers not passing on the cost increases to the consumer for the fear of losing customers.
The trend can no longer be ignored as it would be difficult to sustain the high level of inflation in the long run as increasing input costs will impact the company’s margins. Eventually, it will reach the consumers as the CPI for December 2021 shows a rising trend at 5.59%. The situation puts additional burden on the government to provide a competitive environment and incentives to the local industry to produce at competitive prices to sustain growth in exports. The decision to reduce excise duty on petroleum products was aimed at containing WPI.
The current trend is worrying as steel is witnessing high inflation. Steel is a key input used in engineering industry and infrastructure development. The first quarter of 2022 will be crucial as the Omicron wave may cause further disruption in global supply chains, pushing up the cost of components and freight costs. Any more delay in arresting rising input costs may result in a fall in real incomes of consumers and their savings adversely, thus, affecting the demand. The price rise and the pandemic will only add more uncertainties in the market.
Unemployment remains the biggest challenge
As per a survey by the Centre for Monitoring Indian Economy (CMIE), India’s unemployment rate was at a four-month high of 7.91% in December 2021 as more restrictions were imposed on economic activities by state governments to curb the re-emergence of Covid-19. About 10 lakh young people join the job market in a month. The current trend will further aggravate the employment situation and seriously damage the growth prospects of the economy.
The general public is also concerned about the unemployment issue. A survey by Paris-based market research firm IPSOS confirms that unemployment and the Covid-19 pandemic are the top two issues of concern for 42% of those surveyed in August-September 2021. Creation of jobs outside agriculture is one of the biggest challenges faced by policymakers in India since the 1990s. The Indian economy which grew at unprecedented rates has not succeeded in making any substantial structural changes in employment patterns.
Despite the advent of Industry 4.0 and AI, sectors such as IT and manufacturing are yet to see a proportionate increase in employment opportunities. The services sector is getting highly automated with software replacing humans. In the long run, India needs to up-skill its workforce by imparting training to perform high-end services jobs to remain competitive in IT and other similar services.
Keeping in view the potential of the manufacturing sector to push India’s economic growth, it must get its due from the policymakers in Budget 2022. Even in a large developed economies, the size of the manufacturing sector was at a whopping $2.3 trillion, employing 12.69 million people. Besides changing the taxation level and an enhanced public investment in infrastructure, the government ought to promote private investment by providing tax sops in the budget to achieve employment and economic growth.
The largest segment of the unemployed youth is in rural sector where education level is low. The rural youth will be able to join the formal labour force only with skill upgradation, especially in manufacturing and services. Deendayal Upadhyaya Grameen Kaushalya Yojana (DDU-KY), the scheme launched in 2014 for skill development of rural youth, has shown some results in some states, but there is room for further improvement in the scheme in Budget 2022.
The awareness about the scheme is low and the duration of training (12 weeks) is not considered enough for employability in large industries. Moreover, a minimum secondary level education is the basic requirement. The lack of education infrastructure in rural areas is the main hindrances in achieving greater participation of rural children in school education. These aspects need to be looked at while addressing the skill gap. Schemes like Mudra yojana are helpful in promoting self-employment, but more needs to be done to upskill the youth.
Possible sectoral policy initiatives
New age sectors: On the policy front, new age sectors such as e-commerce and other app-based services deserve special consideration as they provided livelihood to many young people during the pandemic period. With the entry of large groups like Tata, Reliance, the sector offers good career opportunities and growth in the economy. The fast-developing digital technology has created numerous opportunities for organizations to develop new business models, services, and products.
The initiatives from the government are primarily aimed at protecting customers and small traders. However, it is no less important to develop the logistics network and connectivity needed for fast linkages between these large portals and suppliers and manufacturers located in remote areas. This transformation in the way the world engages in business has also created complex security issues and brought to the fore the limitations of the current system of international taxation.
The draft e-Commerce policy has not helped clear many such uncertainties in the policy landscape. Early action in formulating consolidated policy for the sector will ensure policy stability and encourage long-term investment in the high potential sector. Hopefully, the Personal Data Protection Bill, 2019, now renamed as the Data Protection Bill, 2021, will be tabled in the forthcoming budget session and will settle many issues relating to the individual privacy and power of the designated authorities in respect of personal and non-personal data.
Aviation: The civil aviation sector in India has seen significant expansion and changes over the last two decades. Now, with Air India going to the Tatas, the expected revival of Jet Airways, and the entry of Aakash airways, the air transport sector is expected to undergo more changes and will have a positive impact on customer convenience, as well as expansion in regions of the country not yet served.
The successful disinvestment of Air India is a major step in the aviation history of India and it will have a multiplier effect on the economy. With a fleet size of around 125 planes excluding those owned by its subsidiaries, the Tata group, with considerable expertise in aviation and technical support from other group companies will be able to increase usage of the fleet to effect a turnaround and help create a customer-friendly aviation industry in India.
As regards the government role, like most of the countries, India too needs an autonomous, empowered, and effective civil aviation regulator subsuming the current DGCA, and armed with technically qualified personal for framing rules and policies for the sector.
Automobile Industry: The proposed switch to electric mobility is gaining momentum and is vital also for meeting India’s commitment at COP26 UN Climate Change Conference. For an industry having a share of 7% in the GDP, the shift to EVs and local manufacturing deserves special consideration.
The EV battery uses components of metals such as lithium, cobalt, and nickel not available in India. There is a need for an ecosystem supported by the reduction of import duty on basic raw materials. Lithium ore concentrate imported by lithium refinery to produce lithium battery components has an existing inverted duty structure that needs to be addressed. To reduce import dependence in the long term, it is advisable to develop an industry for refurbishing used EV batteries and for recovering of lithium, cobalt, and nickel.
The recycling industry will offer a good business opportunity and saving of foreign exchange with the growth in the EV population. It is high time a comprehensive policy covering lithium refining to charging infrastructure for the development of the EV industry in India is formulated, in addition to the existing FAME and PLI schemes launched for the sector.
MSME sector: MSME units not only generate employment but also achieve it at a much lower capital cost compared with large industries. India has approximately 63 million MSME units. However, the Udyam Registration portal has only 5.7 million registered MSMEs as of November 2021. The percentage share of micro enterprises is around 94%.
Once a small unit is established, its growth and transformation into medium or large economic entities providing both income and employment are vital. But what happens in reality is just the opposite, due to the complicated regulatory environment and bureaucratic interference. The compliance burden increases with their graduating into a medium-scale unit, often compelling them to remain small. Thus, the challenge is providing a balance between the welfare of workers and creating an environment conducive for scaling up.
A simplified law is needed that can be easily accessed, understood, and implemented at minimum cost. The four Labour Codes that consolidated 29 central laws are steps in this direction. The codes faced criticisms from trade unions and employees’ organisations as they are largely perceived to be pro-employer. This perception must be addressed. Moreover, experts have the apprehension that the provisions under the new laws are unlikely to enhance the share of formal employment and the trend of an increasing number of contract workers will continue.
It is agreed that some amount of flexibility in hiring and firing of workers is needed to optimise the workforce as per market requirements. However, some basic provisions of the codes regarding social security provisions, safety, injury, and compensation at the workplace have been made applicable to all establishments, regardless of the size. To summarise, the sector, badly hit by the pandemic, needs continued support from the government to bring back workers from villages.
Budget 2022 will retain growth focus
Under the current circumstances, nobody is expecting Budget 2022 to be populist, despite five states going for elections in February-March. The government is expected to continue with its reforms agenda with a focus on job creation, more spending on railways, and expressways, and disinvestment in PSUs.
Improved connectivity means reduced cost and time in transportation which is good for the growth of the economy. In the last few budgets, however, there were not many steps taken to boost consumption, which is no less important to sustain the fragile economic revival.
On personal income tax, the salaried class would like to see some tax cuts that will leave them with more money to spend. Lastly, the creation of healthcare infrastructure and the scaling up of medical education and training should continue to be among the priorities.