Fiscal capacity facilitates larger investments

The Budget speech of the finance minister was delivered in the background of an economy that has just reached the absolute levels of GDP recorded at the end of March 2019. Therefore, the objective is to really strengthen the growth impulses and steer the economy on a path of at least an 8 per cent plus real GDP growth rate in the medium term. The minister in her strategy has put her faith in ramping up capital investment by Rs 2 trillion and topping it up with an additional Rs 1 trillion of support to the states. The fiscal flexibility to spend more on capital investment has been facilitated on account of buoyant revenue collection, especially goods and services tax (GST), whose collection in January —she announced in the House as a just received message — was nearly Rs 1.41 trillion, the highest in a month under the GST regime since July 2017.

As GST policy is outside the purview of the Union Budget, the government has focused on gathering revenues from the Customs side by concentrating on phasing away duty exemptions relating to capital goods import and in respect of certain concessional imports brought under the project import category. The minimum basic Customs duty rate for such concessional imports has been pegged at 7.5 per cent. These exemptions, which had been phased out for capital goods, have been justified on grounds of supporting the domestic capital goods industry. Unfortunately, a great opportunity to bring down the general tariff rate has been lost. The rate has climbed up from 13 per cent in 2014 to 18 per cent. Lowering the high import tariff on a large number of items would have stimulated the manufacturing sector, where the import intensity is 0.35 per cent. This would have had a dual positive effect on both boosting integrated GST collection on imports and GST collection on domestic manufacturing (more than 70 per cent of GST collection comes from the goods segment of the tax).
 

Further, the buoyancy of GST revenues in the past year has been driven by imports rather than any substantial gain on the domestic manufacturing side. The reduction in tariffs would also have boosted exports where the import intensity is even higher. As former Reserve Bank of India governor D Subbarao remarked, “you cannot boost exports behind protectionist walls”. This opportunity in the Budget should have been used to reduce tariffs on a large number of raw materials and intermediates like fibre, yarn, and fabrics used in the textile industry, especially in the apparel segment, which is the most labour-intensive manufacturing sector in the country. A recent study by Shoumitro Chatterjee and Arvind Subramanian demonstrated the importance of greater imports and openness in stimulating the textile sector. Comparing China and Vietnam during their boom years, they show that exports were highly dependent on imports (40-45 per cent of the value addition in the textile sector). In contrast, India’s import share was only 16 per cent and most of the Indian exports in the textile and clothing were confined to the lower end of the textile industry.

The other important announcements have been revamping the special economic zone (SEZ) scheme. It is accepted that the present SEZ scheme has failed to deliver strong export growth. The government wants to incentivise exporters to set up units within the zone on unutilised land. The Budget promises the administrative regulation by the Customs would be light. To promote ease of doing business in SEZ units, the minister announced undertaking reforms in the Customs administration of SEZs through a fully IT-driven portal that would focus on higher facilitation and only risk-based checks.

Another export-oriented measure in the Budget was to reduce Customs duty on a wide gamut of products across segments, especially where there is a strong MSME (micro, small, and medium enterprises) presence including cut and polished diamond, gemstones, critical chemicals like methanol and acetic acid and inputs required for shrimp aquaculture. To incentivise exports, exemptions have been announced on items such as embellishment, trimming, fasteners, buttons, zipper, lining material, specified leather, furniture fittings, and packaging boxes that may be needed by bona fide exporters of handicrafts, textiles and leather garments, leather footwear, and other goods.

The other major announcement was where the finance minister extended customs duty exemption on steel scrap by another year to provide some relief to secondary steel producers among MSMEs. Recognising the problem of high metal prices, the minister announced revoking certain anti-dumping and countervailing duties on stainless steel, coated steel flat products, alloy steel, and high-speed steel. This will also help the common middle-class consumers of these items.

Finally, to encourage government efforts on blending fuel, an important announcement was made to impose an additional differential excise duty of Rs 2 a litre on unblended petroleum products from October 1, 2022. This is to incentivise blended petroleum manufacturing to use ethanol and other farm products, which would both lower the fuel import bill and help sugarcane producers.

To sum up, the appro­ach towards indirect taxes is really not to rock the boat and continue to boost GST by focusing more on better compliance measures rather than rate changes immediately. On the Customs side, most of the changes relate to phasing out duty exemptions on certain capital goods to support the domestic capital goods industry. In the process, the government would also garner some additional customs revenue.

The writer is a retired member, Central Board of Indirect Taxes and Customs.

Views expressed are personal