Budget 2023-24: The Moneycontrol Manifesto

Budget 2023 is no longer about the ‘new normal’. It is about the ‘next normal’. The next normal in the next 25 years will be a steady state that is on a constant move, fuelled by powerful technological innovations that will empower consumers, and accelerate efficiencies in production processes by several multiples.

This will force businesses to rapidly adopt newer technologies, triggering changes in growth and revenue assumptions in which existing structures will collapse, to be replaced by new models.

All these will have macroeconomic implications too, with trajectories set to change, and most economies, including India, having gone through a reset mode.

The dominant question, from an Indian point of view, is what would it require, from a policy matrix point of view, to turn India into a darling for investors—foreign and domestic—for decades on end?

The report could do well to touch upon this question with more detail.

Moneycontrol, part of the Network 18 Group and India’s biggest digital destination for news, information, insights, and data on finance, markets, economy and related areas with more 650 million page views a month for news, information and data, is honoured to present the Moneycontrol Amrit Kaal Manifesto.

The Moneycontrol Amrit Kaal Manifesto is an attempt to contribute to India’s public policy discourse, ahead of the Union Budget. It contains a broad matrix of fiscal, public finance and policy measures that our editors and experts believe India should focus on.

Capital Gains Tax

As can be expected, changes on the individual income-tax front and the capital gains tax regime will be the main attention-grabber.

Capital gains tax is levied on gains made through the sale of movable and immovable assets. Depending upon the period of holding an asset, a long-term or short-term capital gains tax is levied.

Different asset classes, such as real estate, equity investments, debt instruments, and mutual funds, among others, attract different rates of capital gains tax. Besides, capital gains tax could differ within the same asset class, too, depending upon the holding period and maturity.

The Long-Term Capital Gains (LTCG) tax for listed securities and equity-oriented mutual funds is 10 percent, and for all other assets, including unlisted securities, it is 20 percent.

On the other hand, short-term capital gains (STCG) tax on listed securities is 15 percent, and for all other assets, including unlisted securities, it is calculated as per the taxpayer’s normal slab rates.

The holding period to qualify as LTCG is 12 months for listed securities and equity-oriented mutual funds. It is 24 months for unlisted securities and immovable property, and 36 months for debt securities and debt-oriented mutual funds as well as other assets like gold, REITs/InvITs.

Budget 2023-24 provides a golden opportunity for India to streamline and simplify the complexity in the treatment of capital gains.

To begin with, the government should fix the holding period for all kinds of financial assets at 12 months to qualify as LTCG. The holding period for immovable properties can be raised to 36 months to align with other asset classes.

There is also a compelling case to make investments in Indian securities more attractive by introducing a uniform rate of 10 percent for LTCG and 15 percent for STCG for all financial securities.

Accordingly, the benefit of indexation of purchase cost may no longer be necessary for such assets, for which the LTCG rate is 10 percent.

Individual Income Tax

In Union Budget 2020-21, the government introduced 'a new and simplified personal income tax regime ', under which rates were significantly reduced for individual taxpayers who would forgo certain deductions and exemptions like standard deduction and 80C benefits.

The new tax regime, with lower rates and fewer benefits, was introduced in 2020 but has not found many takers yet. Most taxpayers still prefer the older regime.

Under the new regime, an individual is required to pay tax at the reduced rate of 10 percent for income between Rs 5 lakh and Rs 7. 5 lakh, against the 20 percent in the earlier regime.

Effectively, owing to the rebates under Section 87A, those earning up to Rs 5 lakh do not have to pay any tax -- either under the older regime or under the new regime.
The government came up with a regime to lower personal income tax. People with Rs 8-8.5 lakh income have to pay no taxes, if they take the benefits of 80C, standard deduction and some other benefits.

Under the old tax regime, individuals are allowed to claim various deductions and reduce their tax liability. On the other hand, the new tax regime (introduced in Budget 2020-21) had a better (lower) tax rate, but denied as many as 70 exemptions and deductions (including LTC, HRA, standard deduction, deduction under chapter VI A, etc.)

The new regime will not take over unless the old income tax regime is disincentivised. The simple regime should be broader tax slabs, lower taxes, and very few exemptions.

This budget could well be an opportunity to present a simpler individual income tax slab and rate construct replacing a two-system structure that has been in place since 2020.

Education

The biggest obstacles are going to be the country's long-standing challenges of income inequality and access to quality education. The Union budget needs to talk more about that, starting with access to education.

India is already home to one of the largest millennial populations in the world. In the next decade, the number is only going to grow. It is expected that India will have the highest population of young people by 2030 in the world.

The critical aspect, however, would be to create meaningful employment opportunities for a long period of time.

But the jobs of tomorrow will focus on technologies like AI, cloud and cyber. New skills will be required. Will India's young workforce have the skills to lead the economy forward? It's a fair question and one that will depend largely on what actions both the government and businesses take.

The path forward is clear. It will be harder to get to a $5 trillion economy by 2025, if India doesn’t get this right. India's national education policy is a powerful start, but this is also a critical opportunity for businesses to step up.

The total projected increase in the labour force is estimated to have grown from 480 million in 2011 (in the age group of 15 years and above) to 561 million by 2020.
According to estimates, 40 percent (about 224 million) will be employed in agriculture, 29 percent (about 162 million) in industry and 31 percent (about 173 million) will have to be employed in the services sector.

For the economy to grow at 8-9 percent, it is required that the manufacturing and the services sectors grow at 10-11 percent, assuming agriculture grows at 4 percent. In such a scenario, it is obvious that a large portion of the workforce would migrate from farms (agriculture) to factories and service firms.

However, the skill sets required in the manufacturing and services sectors are quite different from those in the agriculture sector. This implies that there is/will be a large skill gap when such a migration occurs, as evidenced by a shrinking employment in the agriculture sector.

This scenario necessitates skill development in the workforce.

An integrated effort from employers, training providers and government bodies to train people at source, i.e., cluster level or a specific geography, could help mobilise more people for training.

Once the employees reach cities for jobs, they don't have to invest in training and are paid premium salaries, and the employers get employees who are ‘day-one ready’ and then cut down on time and resources in training them.

A single body to enforce guidelines concerning labour and wages would be a much-needed step at the national level which will work with state governments towards implementation.

With a maze of schemes and training initiatives at multiple ministries, it would be imperative for the new ministry to streamline government focus and ensure efficient implementation in the right areas with optimum fund utilisation targets.

A guideline-like compulsory requirement for skilling and training manpower for participating in government projects would be a good start to get employers' commitment to the sector.

Promoting entrepreneurship

Micro, Small and Medium Enterprises (MSMEs) contribute nearly 8 percent to India’s GDP, 45 percent to manufacturing output and 40 percent to exports.

They provide the largest share of employment after agriculture. They are the nurseries for entrepreneurship and innovation. They are widely dispersed across the country and roll out a diverse range of products to meet the needs of the local markets, the global market and the national and international value chains.

Startups generally look for spaces close to where their supporting families and markets are located. Also, the development of smaller parcels is likely to be much less time-consuming compared to bigger projects.

Union ministries should accord priority to such developments, if necessary, by making suitable changes in their ongoing programmes and by higher funding.

The manpower of the District Industries Centres (DICs) should be re-oriented and re-trained for entrepreneurship development, advocacy, mentoring and handholding startup MSMEs (with emphasis on manufacturing).

They may be encouraged to provide such services by building partnerships with professional bodies.

Given that most districts in the country have good infrastructure in DICs (which are now in a state of neglect and decay), the central government may provide funding for its renovation and upgradation, subject to the reform agenda for the DICs, as stated above, being implemented by the states.

Government programmes for funding startups in manufacturing, which have potential for growth, may be provided with higher levels of funding and subsidy.

There should also be focus on entrepreneurial education. One of the main purposes of entrepreneurial education is to produce graduates who are able to succeed and make worthwhile contributions in their organisations.

The experience of large organisations shows that an enterprising employee can be a considerable asset in ‘intrapreneurship’ (entrepreneurship within an organisation).

Entrepreneurial education can enhance employability through transfer of an individual’s skills, knowledge, competencies and attitudes required by the economy and the labour market.

It can further encourage graduates to identify entrepreneurial opportunities and provide them with the knowledge and skills to manage and capitalise on these opportunities.

Startups

One could sense an unmistakable excitement, in any visit to a mall or a neighbourhood shopping complex during this festive season. After two years of a pandemic-pummelled washout, people are spending on both essentials, and aspirational products.

For an economy, which many estimates project will be the primary engine of global growth, this is indeed a happy augury. After all, consumption spending continues to remain one of the strongest pillars of the India growth story.

That said, the warmth in shopping arcades doesn’t seem to be distributed equally across India’s business landscape. Startups is one such area where the winter chill has arrived far too early.

Startup funding in India during the third quarter (July-September) of calendar year 2022 hit a two-year low at $2.7 billion across 205 deals, according to a latest report by consulting and audit firm PwC.

The report, Startup Deals Tracker - Q3 CY22, said that although it has been argued that there is a substantial committed capital waiting to be deployed (dry powder) in the Indian startup ecosystem, it is becoming clearer that selectivity in deal making will increase, with a focus on the path to profitability, especially in growth- to late-stage companies.

This funding winter comes at a time when India has emerged as a serious contender to become the world’s startup capital, with global capital chasing multi-billion dollar ideas in the world’s soon-to-be most populous country.

This raises a question on policy, too. More specifically, can India do more in the policy space to make promising startups raise more capital easily to tide over the uncertain funding winter?

Two years ago, the government came out with Press Note 3, aimed at curbing predatory takeovers by foreign entities. It needs to be reviewed in the current economic situation.

As companies across the globe battled uncertainties that the pandemic brought about in 2020, several economies started to raise concerns about opportunistic takeovers of entities stressed by pandemic.

India introduced Press Note 3 (PN3) in 2020, which required all foreign direct investment (FDI) proposals from an entity based in a country that shares a land border with India, or the beneficial owner of an FDI is situated in a country which shares a land border with India — both referred to as ‘restricted entities’ — to go through the government approval route.

The term ‘beneficial owner’ has different meanings under different laws in India. Depending on how it is defined, it could mean: (i) an entity with a prescribed shareholding level in the investing entity (as is the case under the Companies Act of 2013), or (ii) the owner or holder of ultimate control over the investing entity (as defined under the Prevention of Money Laundering Act, 2002).

A somewhat similar concept is also used by the Securities and Exchange Board of India (SEBI) to identify the ultimate beneficial owner for the purposes of certain securities laws.

The problem for startups seeking funds is that PN3 has not defined the threshold for identifying the ‘beneficial owner’. This ambiguity has also piled up applications from foreign investors seeking government approval, thereby causing delays, and extension of deal timelines.

Budget 2023-24 may be the right opportunity for the government to clarify on these, and ease some of these rules, for funds to flow in quickly, and enable capitalisation of India’s promising startup ventures that are not only pioneering a culture of innovation in the country, but also creating jobs by tens of thousands.

Support to states and capex momentum

In public finance, as it is for households, borrowing, in itself, is not a bad idea, if (a) the bulk of the loans are spent on asset creation; and (b) loans are not taken to fund current expenditure on a perpetual basis.

As per the Reserve Bank of India’s ‘State Finances: A Study of Budgets of 2021-22’ report, the combined debt-to-GDP ratio of states, which stood at 31 percent at end-March 2021, and is expected to remain at that level by end-March 2022, is worryingly higher than the target of 20 percent to be achieved by 2022-23, as per the recommendations of the FRBM Review Committee.

According to the Comptroller and Auditor General of India (CAG), the state governments’ expenditure on subsidies has grown at 12.9 percent and 11.2 percent during 2020-21 and 2021-22, respectively, after contracting in 2019-20. This has pushed up the share of subsidies in states’ total revenue expenditure from 7.8 percent in 2019-20 to 8.2 percent in 2021-22.

A report by Crisil, a credit rating and research organisation, shows that off-balance-sheet borrowings of states are estimated to have reached a decadal high of more than 4.5 percent of gross state domestic product (GSDP), or Rs 7.9 lakh crore, in 2021-22. That marks a rise of more than 100 basis points from 2019-20.

New risks have emerged. The re-launch of the old pension scheme (OPS) by some states, rising expenditure on non-merit freebies, expanding contingent liabilities, and the ballooning overdue of power distribution companies warrant strategic corrective measures.

The power sector, primarily distribution companies (discoms), account for almost 40 percent of the outstanding state guarantees. These were taken to repay the dues of power generation and transmission companies with discoms continuing to make cash losses.

The OPS is mainly an unfunded pay-as-you-go system. Pension expenditure alone accounts for 12.4 percent (average of 2017-18 to 2021-22) of total revenue expenditure of India’s 10 most-indebted states. According to the RBI’s estimates, pension outgo will continue to be in the range of 0.7-3 percent of GSDP in these 10 states until 2030-31.

Many states can see their finances worsen if they start financing a range of non-asset creating social welfare schemes or ‘freebies’ by borrowing more from the market.

According to a study by PRS Legislative Research, during 2018-21, most states have relied on compensation grants to achieve the guaranteed revenue. This, while in 2018-19, states were able to achieve 88 percent of the target on their own and relied on compensation for only 12 percent.

Budget 2023-24 should continue with long-term loans to states to support their capital expenditure programmes. This will give states more fiscal elbow room to spend and supplement the Centre’s capital expenditure plan, which is essential to create jobs and multiply incomes.

The Centre’s Rs 7.5-lakh-crore capex target for 2022-23 includes a Rs 1-lakh-crore interest-free loan to states with a maturity of 50 years. This capex-only loan has been welcomed by states.

The government must contribute to state capex as well through allocation under capital expenditure to sustain growth. It will be a good idea for the Centre to accelerate merit-based or project-based funding, and discourage states from resorting to inordinate market borrowing.

Government finances

If public investment will remain one of the key growth triggers for the next year, it will have to go hand-in-hand with fiscal consolidation.
The pandemic years have seen the government’s fiscal deficit and stock of debt balloon. Annual deficit roadmaps were disbanded and a medium-term target of 4.5 percent of GDP by 2025-26 was announced even before the pandemic struck.

The International Monetary Fund (IMF) has said India should clearly communicate its medium-term fiscal consolidation plans.

Now, with the debilitating effects of lockdowns and the virus firmly behind us, and tax collections handsomely beating budget estimates, Budget for 2023-24 should make marked progress in improving its finances.

The fiscal deficit should be kept between 5.8 percent and 6 percent in order to stay on the glide path towards a medium-term target of 4.5 percent of the GDP.