Budget 2023 should give a demand boost to the Indian economy. (Representational Image)
The Narendra Modi-led government has taken a series of supply-side measures in the last few years to give a big push to manufacturing and, in turn, to investment and GDP growth. The measures implemented include a reduction in taxes on the profits of corporations, higher import tariffs for some items to protect the domestic industry from cheap imports and production-linked incentive (PLI) schemes. The tax on profits of new manufacturing units is now as low as 17 percent.
However, in the absence of sufficient demand, the supply-side measures are turning out to be largely ineffective. Clearly, measures are needed to boost demand, especially for discretionary goods and services.
India’s central bank, the Reserve Bank of India (RBI) can’t reduce interest rates to support credit-induced demand for high-value items such as homes and vehicles at a time the fear of inflation is still high, and the US Fed remains hawkish. However, by allowing the Indian rupee to depreciate steadily against the US dollar, it can support demand in net exporting sectors such as automobiles, pharmaceuticals, textiles and all kinds of business services including IT, despite a bleak global macroeconomic environment. At the same time, it will protect domestic businesses from dumping and the import of subsidised goods from countries such as China, a major concern of policymakers. Thus, a weaker rupee could address the problem of both external as well as internal demand simultaneously. High tariff walls, on the other hand, supports domestic demand only.
To make matters worse, excessive import protectionism leads to the creation of an inefficient industrial structure that impedes exports. Therefore, a weaker rupee should be preferred to high tariff walls. Unfortunately, the Indian government has been raising import barriers, while the RBI has been too defensive about the exchange rate of the rupee. It’s time to reverse this approach, more so when changing geopolitical dynamics provide a big opportunity to push India’s exports as countries and corporations want to buy less from China. Budget 2023 should therefore resist increasing import duties.
Any fiscal support to boost domestic demand will help. However, given the resource constraints in India, it should be focussing on sectors with strong backward and forward linkages with other industries. Examples of such industries include automotive and real estate rather than the processors of globally over-supplied commodities such as aluminium and steel. The automobile industry has been struggling due to excessive regulatory rent-seeking and a rush to adopt tighter emission control. Exorbitantly high taxes on vehicles and fuels, and snail-paced development of quality public transport work at cross-purpose. The former tries to curb automotive demand, while the latter increases the demand for personal vehicles. A significant portion of carbon emissions can be reduced if we push for a decentralised development model that will help cut congestion in top cities and end traffic jams. Besides, creating jobs is as important as curbing air pollution. We are not closing all coal-fired power plants to push clean energy. Similarly, we should not penalise conventional internal combustion engine vehicle sales (vis-a-vis EV sales), given the implications for manufacturing GDP and jobs. EVs are not as green as we tend to believe and they are worsening India’s trade deficit with China.
A well-functioning real estate sector can support multiple dependent industries ranging from cement, steel and tiles to household appliances. To be fair to the current government, it has already taken several measures to clean up the sector by implementing the Real Estate (Regulation and Development) Act, 2016 (RERA) and banned ‘benami’ transactions to curb speculative demand. Yet, there are more measures to be taken.
The key input for real estate is land, but its supply is limited. That, however, doesn’t mean its effective supply can't be increased. The government and many state-owned enterprises are holding prime land parcels in top cities that can and should be released to the market. It will help bring down land prices. Besides, increasing the floor surface index (FSI) can help in cities like Mumbai. Similarly, a reduction in stamp duties and registration charges can give boost demand in the real-estate sector when interest rates on home loans are on the rise.
It’s important to realise that an improvement in the purchasing power of the poor will support the demand for essentials such as food and clothing. But an increase in demand from the lower income groups alone will not help the economy. It’s the relatively affluent households that drive consumer demand for high-value discretionary items such as consumer durables, education, health and recreation services, and homes. Unless they get some relief in form of lower taxes on their incomes and consumption, households’ demand and, in turn, private investment and GDP growth might stay muted.
Job intensities of manufacturing firms have been declining due to increasing labour-saving automation. India’s slow-progressing labour market reforms are not helpful either. And so, fewer jobs are created per unit of investment. Therefore, there is a need to focus more on labour-intensive services to boost job creation and stimulate demand for goods and services.
The government is increasingly relying on indirect taxes, which tend to be regressive and hurt demand. A better idea is to cut direct tax rates and widen the tax net by including rich farmers under the purview of income taxation. Income taxes should apply to all incomes including those from agriculture. A wider tax net with low tax rates is the key to boosting tax revenues without hurting demand. Reducing the gap between corporation tax rates and other income tax rates such as personal income tax rates will help households and small businesses, and thus should be considered in Budget 2023 to give a demand boost to the Indian economy.
Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited. He tweets @RiteshEconomist. Views are personal, and do not represent the stand of this publication.
