Why Budget 2024 must focus on manufacturing, emerging sectors, and R&D

Election year budgets have historically been populist and far removed from the reforms agenda.

With the 2024 Lok Sabha elections around the corner, the finance minister is set to announce the interim budget on February 1. Even as India is the fastest growing major economy worldwide, good economics doesn’t necessarily make good politics. Election year budgets have historically been populist and far removed from the reforms agenda.

Even though this budget would be an interim authorisation to spend money, economists expect it to strike an equilibrium between populist measures and fiscal prudence to contain the fiscal deficit to 5.3 percent and 4.5 percent of the GDP by the end of 2024-25 and 2025-26, respectively.

This will be challenging since electoral populism will push infrastructure, agriculture and rural sector allocations to go up. The budget, however, can be prudent as well as welfarist. It also must focus on three key areas: manufacturing, promoting emerging sectors, and research and development.

Prudent Welfarism

On Republic Day this year, Union Finance Minister Nirmala Sitharaman
stated that the government's policies will prioritise the welfare of youth, women, farmers, and the poor. She must rationalise income tax slabs to give more disposable income to the vast voter base comprising the burgeoning middle class which would lead to higher consumption of fast moving consumer goods and consumer durables. Expectations also include increased basic exemption and standard deduction, higher limits for 80C and an annual LTA exemption rather than it being twice in a block of four years.

Government spends almost 2 percent of its GDP on public healthcare. At this spending level, India would not be able to move closer towards universal health coverage. Similarly, public spending on education and skill development is barely 3 percent of India’s GDP. At this level of spending, India’s demographic dividend would remain an unrealised opportunity. Healthcare and education pull down India’s Human Development Index (HDI) substantially. Government must spend at least 3- 6 percent of its GDP on health and education, respectively. This year’s budget must herald a gradual shift in this direction.

Prioritising Manufacturing 

Growing India’s manufacturing share in the GDP will be crucial to increasing the country’s middle class. The finance minister should consider a reduction in duty of input raw materials for agricultural machinery so that farmers are able to afford such equipment. It would also eventually help in exporting Indian agricultural equipment worldwide. The real estate industry’s housing sector expects a major increase in the interest rate deduction cap to Rs 5 lakh, a redefinition of affordable housing in metropolitan cities and tax benefits for first-time homeowners. India’s
pharmaceutical sector also requires stepped-up government support including development of new industrial economic zones in Tier 2 and 3 cities.

The next step would be to enhance trade to GDP ratio. Unrealistically high import tariffs intended as protectionism for domestic industry ends up promoting local products even if those are of poorer quality. It is imperative to negotiate and secure trade agreements with major global economies. Such an announcement of intent in the Budget would be vital for building investor confidence.

Emerging Areas 

With the slew of national climate commitments, India should consider a concessional tax regime for companies investing in green technologies. Additionally, India’s Electric Vehicle (EV) industry expects the FAME II subsidy program to continue to meet the government's ambitious target of achieving 30 percent EVs on Indian roads by 2030. Even though GST changes are kept outside the purview of the Union Budget, industry wants lowering of GST rate on lithium-ion batteries from 18 percent to 5 percent, in sync with EVs sold with fixed batteries, to encourage battery swapping. Production-Linked Incentives (PLI) should be extended to the manufacturers of batteries and electric power manufacturing, and the storage industry.

Budget should also signal measures to develop an appropriate semiconductor ecosystem. Similarly, a thriving fintech ecosystem is crucial for digital penetration and innovation and the budget must rationalise regulations in this space and could offer tax incentives for start-ups in this sector. For a further boost to the overall start-up ecosystem, India needs simplified regulations and incentives tailored for key sectors and enhanced governance standards.

R&D Spend 

India spends 0.7 percent of its GDP on scientific R&D – the lowest amongst the US, China, Japan, South Korea and even BRICS and OECD countries. Intellectual property and patent development are critical to accrue higher economic value addition to a nation; and unless India treats the scientific research sector with earnestness, failure would persist. India’s R&D spend must be gradually enhanced to 2.5 percent of GDP.

While India’s ease of doing business has improved, we need to jump to being amongst the top 10 nations. Additionally, investors, particularly from overseas, expect regulatory certainty in the country. If the budget speech addresses these subjects, it would be good news for businesses in leading countries looking to relocate from China.

Jayant Krishna is a senior fellow with the Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington, DC. Views are personal and do not represent the stand of this publication.