Budget 2025-26: Operationalising the trade route to economic growth

It would have been better had the government gone in for across-the-board Customs duty rationalisation instead of picking and choosing sectors across the board

The Economic Survey, presented in Parliament on Friday, outlined clearly the growth challenges to India becoming a Viksit Bharat by 2047. It has clearly stated that to achieve this, the economy has to grow at 8 per cent per annum for the next 20 years. This is one and a half percentage points higher than the current trend rate of 6.5 per cent.

 

The macroeconomic challenge has also to draw lessons from international growth experience in the post-Second World War years. Historical experience shows that no country in the post-Second World War era has consistently grown at more than 7 per cent without clocking 15 per cent plus growth in exports.

 

 

It is quite clear that India’s growth story cannot rely on domestic demand, which is a puny $500 billion as against the global market of $38 trillion. The role of trade policy is, therefore, central to India’s growth story.

 

Exports of manufactured products in the labour-intensive sectors of textiles/apparel, leather and footwear, toys, and food processing products have to grow. Apart from boosting overall growth, it will create employment. The Budget takes a few steps in this direction.

 

Customs duty on critical minerals used by various segments of the manufacturing sector like electric vehicles and electronics has been reduced. In labour-intensive segments, basic Customs duty on select industries has been brought down. For example, Customs duty on capital machinery used in the shuttle-less looms for manufacturing technical textiles has been reduced. Duty on raw materials used in manufacturing batteries for electric vehicles has been reduced. This is a sector in which China is dominant. Similarly, Customs duty on the manufacture of critical inputs used by the leather industry like wet blue leather and and crust leather has been reduced. In the telecom sector, to prevent classification disputes, the customs duty on carrier-grade ethernet switches has been reduced from 20 per cent to 10 per cent to make it at par with non-carrier-grade ethernet switches.

 

Additionally, some key industries like marine exports have also benefited from Customs-duty exemption on raw materials. The other industries are shipbuilding and shipbreaking, and maintenance, repair, overhaul.

 

Along with Customs-duty reduction, the finance minister has continued the earlier Budget emphasis on simplifying procedures on the Customs side and reducing tax uncertainties. This measure includes timelines for finalising a provisional assessment (two years) and allowing for voluntary declaration by importers and exporters of certain material facts, insulating them from penalties. The timeline for furnishing end-user certificates for exemption granted on imports has also been extended with the flexibility for submitting quarterly returns instead of monthly returns.

 

While these are laudable steps it would have been better had the government gone in for across-the-board Customs duty rationalisation instead of picking and choosing sectors. Ideally, the government should have gone in for a three-tier structure: Lowest rates for raw material/consumables (5 per cent), a slightly higher rate for intermediates (7.5 per cent), and 10 per cent for the rest. This would have enshrined the principle of fixing an inverted duty structure and maximising value addition in India. This would have been better than merely reducing the number of Customs-duty rates to eight.

 

Another important simplification has been reduction in the number of cesses on various products. The social welfare cess has been abolished on a number of items. The idea is that there should only be a maximum of one cess per product.

 

While the rate changes in goods and services tax (GST) have to be done through the GST Council, it is important that the government, in consultation with the states, brings electricity under GST. This will help to bring down electricity tariffs, which are too high and badly impact both large firms and micro, small, and medium enterprises. This was brought out by the Economic Survey while comparing electricity tariffs in India with those in Vietnam. The inclusion of electricity in GST would bring down the cost of electricity by offsetting the tax levy on capital equipment used in generating electricity. This would especially help the renewable-energy sector (solar and wind), which uses a lot of capital equipment.

 

Further, industrial tariffs should not be used for cross-subsidising consumer tariffs. Richer consumers should subsidise poorer ones.

 

In conclusion, rationalising indirect taxes should be used as an instrument to raise the tax-to-gross domestic product ratio. The Budget seeks to achieve a lot of objectives through mission mode programmes. Perhaps it is time now to set up a fiscal-policy mission through identifying tax strategies to raise the tax-to-GDP ratio from 18 per cent to 20 per cent in the next three to five years. This will also provide fiscal space to the government to spend on education (skilling) and health to create a productive labour force. It is no wonder that Adam Smith began his famous work The Wealth of Nations with the line “labour is the source of all wealth”.

 

---

The author is former member, Central Board of Indirect Taxes and Customs