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Is Budget 2019-20 a Hope for India’s Development?

The growth from $2.7 trillion to $5 trillion amounts to an output expansion of 85 per cent, or at about 13 per cent compounded annually

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budget 2019-20
he growth from $2.7 trillion to $5 trillion amounts to an output expansion of 85 per cent, or at about 13 per cent compounded annually. Pixabay

Since the time Prime Minister Narendra Modi has set a bold target of making India a $5 trillion economy by 2024 at a NITI Aayog meeting early last month, the conversations in the mass media have disproportionately centred on the idea.

The Economic Survey – released a day before the Budget was presented in accordance with tradition – elaborated upon the idea and suggested that India needs to grow at least at 8 per cent per annum to achieve the target.

As per our estimates, however, this figure seems conservative. The growth from $2.7 trillion to $5 trillion amounts to an output expansion of 85 per cent, or at about 13 per cent compounded annually.

Assuming inflation of 4 per cent, which is the mandated target for the Reserve Bank of India (RBI), the required real growth of the Indian economy is estimated at 9 per cent per annum. Nevertheless, in either case it can be argued that the $5 trillion target will be challenging for the Indian economy.

The few economies that have achieved such high growth rates on a sustained basis are Asian economies like China and South Korea. The survey rightly identified investment, and more specifically private investment, as the key driver of such sustained economic growth, which has been the case for these high-growth economies.

budget 2019-20
Minister of Finance Smt. Nirmala Sitharaman.

It recommended that on these lines, the private sector needs to be re-vitalised and an aggressive exports strategy should be followed. Such a suggestion raised hopes of a fiscal stimulus from the budget of the newly elected government. This would have complemented the monetary stimulus being provided by the RBI through three successive rate cuts.

The budget did chalk out a blueprint for undertaking large-scale infrastructure activities, which are usually the means adopted to provide a fiscal stimulus. The plan includes improving the country’s transport infrastructure through the construction of water grids, I-ways and regional airports along with a massive boost to develop the rail infrastructure over the next decade.

But instead of infusing taxpayer money, the budget proposed the Public Private Partnership (PPP) model to meet its financial needs. While such a model might be fiscally prudent, the PPP model might face challenges to take off as the investment activity in the economy is already subdued and a more direct fiscal push would be required to kickstart growth.

For now, the government has prioritised fiscal prudence by lowering the fiscal deficit target to 3.3 per cent of the GDP for FY20, which had been pegged at 3.4 per cent for the current fiscal in the interim budget.

While the intent to stay on the path of fiscal consolidation is commendable, it would not have been as problematic to ease on the tightening considering the urgent need to improve economic growth currently.

But a deeper look into the budget figures shows that the lower fiscal target might be missed next year. The fiscal deficit target of 3.3 per cent is based on the estimate that the net tax revenue for the current fiscal would see an increase of over 25 per cent over the previous fiscal.

budget 2019-20
How will 2019 budget look like? Pixabay

This seems optimistic when considered against the fact that the tax revenues had merely risen by 6 per cent in the last fiscal cycle. A fiscal stimulus was probably avoided in the current budget keeping the uncertainty of the tax revenues in mind.

Another case of where the budget financial estimate can prove optimistic is in the disinvestment target of over Rs 1 lakh crore, which includes the sale of Air India. Considering the current state of the airline sector, an imputation of the sale of the debt-ridden government airline should be included with caution. Thus, steering clear of fiscal exuberance was probably the appropriate approach.

While the path to a $5 trillion economy is a medium-term goal, the budget also carried promising elements that point to the right directional approach that the economy should adopt over the long run. It has long been argued that the obsession with GDP figures fails to take into account the real issues that matter to the citizens of a country. The idea that higher output leads to higher incomes, which would enable well-being of citizens can be simplified by directly ensuring improvement in the well-being of the populace.

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Hence, the stress on enhancing the ease of living in the budget is a commendable idea to pursue. Surely, the provision of efficient services in a society – be it health or education – supersede the specifics of growth levels at 8 or 9 per cent for the average Indian citizen.

The government has a rare opportunity to introduce such impactful change in the Indian economy owing to its strong electoral mandate and it is promising to witness its effective utilisation on this front.  (IANS)

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Scheme to Spur Mobile Phone, Semiconductor Manufacturing Soon: FM Nirmala Sitharaman

Already, India, which has second position in the global mobile handsets market, is projected to grow to 302 million units this year

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Economy, Nirmala Sitharaman
FM Nirmala Sitharaman stated that India is still projected to be the fasteat growing economy. Wikimedia Commons

Finance Minister Nirmala Sitharaman on Saturday said a scheme on encourage manufacturing of mobile phones, semiconductor packaging and electronic equipment is on the anvil.

Making the announcement in the Budget speech, she said: “There is a cost advantage for electronics manufacturing in India”.

But she says that this needs more investment. “I propose a scheme to encourage manufacturing of mobile phones, semiconductor packaging and electronic equipment”, she said, adding this can be used for manufacture of medical devices as well.

A detailed scheme with details will be released soon, the FM said.

A Modified Special Incentive Package Scheme (MSIPS) to promote aggressively a 20-odd component manufacturing ecosystem in the country that will go beyond making mobile phones could be on the anvil. This could be an overarching policy which goes beyond interest subvention and credit default guarantee and it will be outside the scope of MeitY (Ministry of Electronics and Information Technology) and by an outside department/arm since ministry’s role is that of a policymaker only.

Finance, Minister, Nirmala Sitharaman, GDP, Measures
There is concern about the speed and nature of the government and industry’s response, and will these actions turnaround things immediately, or not. Pixabay

M-SIPS was first floated to encourage electronics manufacturing and it ran from 2012 to 2018. It promised multiple incentives for 10 years, including a capital subsidy of 20 per cent in special economic zones (SEZs) and 25 per cent in non-SEZs, and reimbursements of countervailing duty or excise on capital equipment for non-SEZ units.

For some high-capital projects, it also offered reimbursement of Central taxes and duties. The incentives were available for 29 electronic verticals across the manufacturing value chain. The period of benefits was reduced to 5 years from 10 years after it was recalled.

M-SIPS was created to provide financial incentives across the ESDM (Electronics System Design and Manufacturing) value chain to compensate for cost disability in manufacturing and Electronics Manufacturing Clusters (EMC).

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This sector has shown tremendous promise wherein exports have grown from a mere US $200 million three years ago to over $2 billion in the year 2019-20 in handsets alone — a 10x growth in 36 months.

One of the most successful stories around Make in India is mobile handset manufacturing with Noida outside Delhi becoming the new hub. The size of the domestic mobile manufacturing industry in FY 2019-20 is expected to be Rs 1,35,000 crores as against Rs 94,000 in FY 2016-17.

Already, India, which has second position in the global mobile handsets market, is projected to grow to 302 million units this year. (IANS)