Towards a Growth-Oriented Budget

11 Jan 2017

The forthcoming Union Budget will be presented against the backdrop of heightened expectations that the government would unravel reform-centric policies and action plan which would rejuvenate our growth drivers and transform the economy. No doubt, the economy in general has done quite well in FY17 with a normal monsoon heralding a bountiful crop harvest, private consumption holding up well and a sharp moderation witnessed in inflation indices.

However, with economic growth expected to momentarily lose momentum in the second half of this fiscal on account of the demonetization drive, there is widespread anticipation that the government will take bold and pragmatic measures to mitigate and reverse the downside risks to growth. What is more certain areas like weak private sector investments, mounting NPAs and low credit off take by industry also call for urgent policy action in order that the economy achieves a sustained and inclusive growth of 8 per cent and above in the near future. Against this backdrop, following are the CII’s pre-budget recommendations for Union Budget 2017-18 to the government:

<strong>1. Revive Investments</strong>

a) Accelerate PSU Disinvestment

• It is pivotal to raise funds from Public Sector Units (PSU) divestment. In the Union Budget FY17, the government had fixed the disinvestment target at Rs 56,500 crore for 2016-17, out of which Rs 36,000 crore was to come from minority stake sale in PSUs and Rs 20,500 crore from strategic sales. In the first seven months of the current fiscal so far, government has collected Rs 21,409.8 crore (which amounts to 38 per cent of the total budgeted target) so far.

• By 31st December 2017, government should try to divest/ privatize 100 companies including the 74 identified by NITI Aayog. This is critical for the government to meet its disinvestment target for the year.

b) Implement Kelkar Committee Recommendations on Public Private Partnership (PPP)

• The key is dispute resolution with the many stuck PPP projects. The government should target redressal of all existing disputes in PPPs through dispute resolution Mechanism by 31st December 2017.

c) Asset recycling •

The government should recycle existing government assets. Example, railways had opened up development of railway stations on PPP basis. It will be interesting if 50 rail stations under development around the country could fructify by December 2017 and this should be announced in the budget since the railway budget is now included.

<strong>2. Employment: Reducing the effective cost of creating good quality jobs</strong>

The economy has created many jobs in informal services and contract jobs. However, the moot issue is the quality of employment generated.

• For existing firms: The government should extend the policy frame work provided for textile and apparels to all sectors. This provides for fixed-term employment and State provision of employers Provident Fund (PF) contribution in the first year.

• For new firms: The need is to move from subsidies and incentives to removing the burden of state regulation on start-ups. This can enable creation of 10 million start-ups in next 5 years by allowing these new start-ups to comply with regulations through self-declaration for all interface with the state for the first 5 years. The definition of a start-up shall be any firm less than 5 years old with no further qualification.

<strong>3. Innovation led Economy</strong>

• CII recommends building a National Technology strategy between government and industry.

• There is need to substantially increase investment in technology by firms doing in-house R&amp;D. Public investment in research in the higher education sector is 0.04 per cent of GDP which needs to increase ten-fold in order to reach the global average of 0.4 per cent. Similarly, private sector investment in inhouse R&amp;D which is currently 0.3 per cent of GDP needs to increase five-fold in order to reach the global average of 1.5 per cent.

• CII recommends creating a National Innovation Fund with a corpus of at least Rs. 10,000 crores. The government has Rs 8,000 crores in the Consolidated Fund of India collected through Cess on technology imports which can be used for this purpose. This should be awarded to the firms on the basis of competitive proposals judged by peer review.

• The state provides abundant funds for research in autonomous laboratories which currently stands around Rs 90,000 crore. However, there should be an increase in funds to finance research in public higher education institutions. The increase would take research in higher education from Rs 5000 crore to Rs 15,000 crore.

<strong>4. Reduction in Corporate Tax Rate and withdrawal of all incentives</strong>

CII has proposed that corporate tax be brought down to 18 per cent including all surcharges and cess. In return all tax incentives, concessions could be removed and there would be no need of grandfathering of the previous incentives. CII’s calculation of Profit Before Tax (PBT) and tax foregone in 2014-15 indicates an effective rate of 19.8 per cent without any tax incentives/ concessions. We believe that in the past when corporate tax has been lowered, corporate tax collection has gone up. An 18 per cent corporate tax should therefore not lead to revenue loss to the government and at a stroke move us away from a high tax, high concession regime. This will help bring India in line with the most attractive international investment destinations such as Singapore, Sri Lanka, UK and Turkey. Additionally, it will also send a powerful message to Indian industry and global investors that India is an attractive investment destination and a huge enabler for Make in India.

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