<b>Naushad Forbes:</b> Kick-starting investment

The Budget should be judged on how it enhances the long-term potential of the economy

We live in uncertain times — Brexit, the US Presidential election, demonetisation — all have unknowable consequences for the international and domestic economy. Against this uncertainty, we should focus on a long-term certainty: The health of the Indian economy. India has been one of the world’s 10 fastest-growing economies in the last 25 years, and every forecast says it will be one of the 10 fastest-growing economies in the next 25 years. The question is not, then, whether we can grow at six or seven per cent, but whether we can grow at nine to 10 per cent. We must drive the structural reforms necessary for double-digit growth for a generation in order to include many more millions in our progress.  

It is this long-term potential of the Indian economy that we should seek to enhance; next week’s budget should be judged on how it advances this process.

We see four clear tasks for this Budget. The first is kick-starting a new wave of investments. Investment has contracted over the last three consecutive quarters, and the latest data on declining project activity from CMIE and the department of industrial policy & promotion (DIPP) is not promising. The Budget must emphasise public investment in infrastructure projects, and create the right environment for private sector investment. We have recommended setting a clear deadline of December 2017 to (i) privatise 100 PSUs, including the 74 identified by the NITI Aayog; (ii) address all pending PPP disputes through the Kelkar committee dispute resolution mechanism; and (iii) ensure that 50 train stations around the country are under development in PPP mode. All of these three objectives are stated policy of the government; what is necessary is delivering on them rapidly — we say no later than December 2017.

The second task is addressing the tax structure. In its recommendations to the ministry of finance, CII has suggested that the corporate tax rate should be reduced to 18 per cent. While this seems like a big reduction, once one adjusts for incentives and concessions, it is just below the current effective tax rate on corporate profits (19.8 per cent). This tax rate can be accompanied by withdrawal of all incentives and concessions, and as 18 per cent is in any case the Minimum Alternate Tax rate, this requires no grandfathering of existing incentives and concessions. At a stroke, we would deliver a corporate tax rate that would place India among the most attractive investment destinations worldwide, and deliver a low-tax low-concession regime. It would also be more progressive than what we have now: Today, most smaller companies pay the maximum tax, and the larger companies take (entirely legal) advantage of exemptions in our complicated tax code to pay far lower rates.

As Surjit Bhalla has persuasively argued, we could also address personal income tax in a similar manner. He argues that a personal income tax rate of just 12 per cent, again with no deductions or exemptions, could be expected to deliver a much higher level of compliance that could fund a widespread basic incomes policy. Although Mr Bhalla does not argue this, I cannot but point out that a tax regime that officially exempts half the population from income tax coverage (half our work force is in agriculture) is one where the coverage and reach of the tax net is always going to be limited. I see no political will anywhere, though, to address this gap — our focus on perfecting the barn-door seems to keep us from realising that we have yet to build the barn.

A third major priority is developing an innovation-led economy. Indian industry currently invests 0.3 per cent of GDP in R&D, against a global average of 1.5 per cent. And publicly funded research in higher education is 0.04 per cent of GDP, against a global average of 0.4 per cent. How do we multiply industry investment by a factor of five and higher education investment in research by a factor of ten? The government can utilise the cess collected on technology imports (around Rs 8,000 crore is sitting in the Consolidated Fund of India) for a National Innovation Fund of Rs 10,000 crore for innovation projects through a competitive bidding system. And by pegging all public funding of autonomous government R&D laboratories at the current nominal level, we could at a stroke treble public funding for research in higher education. The result would be a transformed national innovation system.

Finally, we need to reduce the cost of creating good-quality jobs. We can do so by combining some flexibility for employers with some protection for employees, as the new textile and apparel policy provides — and extend this to all sectors. And we can facilitate the creation of millions of start-ups, by letting any firm that is less than five years old deal with the state entirely on a self-declaration basis.

I cannot resist adding two more sentences. Last year’s Budget had two striking announcements: To try a pilot project of replacing our expensive fertiliser subsidy with a direct benefits transfer to farmers, and to put in place a sunset clause for all new central government schemes, so that we halt the annual proliferation of schemes that we ritually see. Both are landmark proposals which were widely acclaimed. We would love to hear how they are progressing.  

While this article has been all about what we should do, we should also be clear what we should not do. We should not see populist measures aimed at the various state elections. We should not see Rs 100 crore here and Rs 100 crore there for various schemes in Punjab, UP, and Goa. Instead, we should keep coming back to our long-term potential and task.

All the proposals we have discussed above are sector-agnostic and economy-wide. All of them rely on sensible economic principles. All of them simplify. And all of them are revenue-neutral in the immediate time-frame and, we think, strongly revenue-generating in the medium term. They deserve our attention. 

The writer is President, Confederation of Indian Industry