Previously, there were disagreements about whether India’s economy was or not struggling in the recent past. However, the COVID-19 pandemic has brought everyone on the same page (1).
Last week, the Indian government released the First Advance Estimates of economic growth for the current year. The analysis (2) did not make a pretty picture. In the current year, the Indian per capita GDP, per capita private consumption, and the level of investment in the economy; all would fail to levels last witnessed in 2016 or earlier.
There is also more clarity that the economic pain is not distributed equally among the population. It has become comprehensible that the pandemic has hurt those worse off, especially poor wage earners and small business people.
During the 1930s and world war-II, the British government had announced a committee to look into the social insurance state in 1950 out of concern for its citizens. Sir Willian Beneridge led the committee and submitted a report in 1942.
The report officially titled ‘Social Insurance Allied Services’ came to be known as the ‘Beveridge Report,’ which formed the modern British welfare state.
While arguing for an entirely new blueprint for social policy in Britain, Beveridge stated that when the war eliminates landmarks of every kind, it is a moment for using expertise in a clear field. He added that a revolutionary moment in the world’s history is a time for revolution and not for patching.
In the report, Beveridge painted the ‘the five giants’ or social evils needed to be slain.
When fully developed, he also wrote that social insurance could provide income security, an attack upon want. However, Want is the only of five giants on the road of reconstruction and, in some ways, the easiest to attack. The remaining ones are Disease, Ignorance, Idleness, and Squalor.
The five giants of Beveridge include:
- Want; Deprivation or poverty
- Disease; Healthcare
- Ignorance; Inadequate education
- Squalor; Inadequate house
- Idleness; Underemployment or unemployment.
Post-war Britain witnessed a surge in new social policies that included nationalized healthcare in the NHS, National Health Service, free education, unemployment benefits, public housing, and more.
A growing data body suggests that Beveridge’s five giants are plaguing India more than ever (3).
A case in point is the first phase results from the National Family Health Survey-5 (4). According to The Indian Express, the country has suffered a shocking child malnutrition reversal for children born between 2014 and 2019. It is alarming when one notes that India already had the largest number of malnourished kids worldwide.
As per Beveridge, ignorance is an evil weed that dictators cultivate among their dupes, which no democracy can afford amongst its citizens.
Repeated ASER, Annual Status of Education Reports have depicted the struggles of Indian students to master basic skills. Thus, it is robbing their ability to participate effectively as an adult. It is worth highlighting that school education has suffered massively during the pandemic, especially for those on the digital allots flawed side.
Another thing threatening to turn the Indian demographic dividend into a demographic bomb is diminishing the labor force participation rate and persistently high unemployment rate levels. In recent years, unemployment has not only surged from over 2% at the start of the previous decade to about 7 to 9% in the past couple of years, but it has also deeply entrenched whereby millions of Indian youth are too disheartened even to seek employment.
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Moreover, the difficult state of migrants in the previous year brought home to the country’s wretched state of housing, especially for the vulnerable and poor. It is not to say that even the middle class has sorted its housing distress. The Indian real estate sector is also struggling from being a non-performing asset for the banking system while thousands of owners are still helplessly waiting for their promised homes.
The most fundamental of all problems is the plummeting per capita incomes, with poverty to rise sharply. Even from a policy-making perspective, it is short of a perversion that the country’s last formal data on poverty is almost a decade old. However, all the evidence points to the rising poverty level in the past several years, especially in 2020.
In three weeks, India’s finance minister, Nirmala Sitharam (5), would rise to present her third union budget. She has assured everyone that the country could be an engine of economic growth worldwide.
The Upcoming Budget
The Finance Minister, Nirmala Sitharam, will present the Union Budget for the upcoming fiscal year 2021-2022 on February 1. It would assume significance as it would be presented during the on-going pandemic and highlight how the government would administer funds to revitalize the Indian economy, likely to contract by 7.7% in the current fiscal year.
According to experts (6), the budget would focus on the government’s Atmanirbhar Bharat Abhiyan and surmise incentives for the production sector on top of the recently declared production linked incentive scheme.
Nevertheless, the statement from Sitharaman about the upcoming budget to be an exceptional one, which India has not seen in the past 100 years (7), has already raised the bar very high and has built positive vibes in the capital market similar to the Indian government announcement of approving a few vaccines to combat the deadly coronavirus.
“Hundred years of India wouldn’t have seen a budget being made a post a pandemic like this. Considering our size, the population, and the potential that India holds, for a good growth-related building of our economy, I won’t hesitate here to say that we shall be the engine of global growth, along with a few other countries.”
– Nirmala Sitharam (8).
With the optimistic approach, the sharemarket indicates recovery with the highest trading volumes and foreign investors pouring money, thereby constructing an all-time high foreign fund inflow.
The non-residents and overseas investors expect the Financial Minister to make certain announcements that could act as the vital driving elements to keep the market bullish and the momentum surging upwards.
The share market is presently trading at all-time high levels and volumes, and the rally of foreign investors’ funds continue to make the market resilient. There are high chances that the upcoming budget would give a positive signal to boost their sentiments further and help the country come back to shape rapidly.
According to the PHDCCI, Progress, Harmony, and Development Chamber of Commerce and Industry (9), India, refueling the consumer demand could be the theme of the upcoming Union Budget with the multiplier effect on production possibilities, private investment, Capex expansion, and employment creation. It was mentioned in its ten pronged strategies the industry body suggested to the Finance Minister last month during the pre-budget consultation.
The strategy revolves around the measures aimed at refueling consumer demand and encouraging private investments. The strategy elements also include front-loading of infrastructure and industrial investments by establishing DFIs, reducing the costs of doing business, increasing the Tax to GDP ratio, strengthening MSMEs, and easing exports (10).
According to PHDCCI, any measure aimed at boosting growth must keep the rural and agriculture sector upfront and carry out effective social infrastructure reforms.
The economy has indicated early signs of recovery in the past few months. To sustain the impulse, India needs to ensure great support to demand building in the economy with lower interest rates for businesses and consumers, fewer compliances for MSMEs with an ease of doing business on the ground level, and a lower tax regime to boost people’s disposable income, stated Sanjay Agrawal, the President of PHDCCI (11).
He further added that to rejuvenate the aggregator demand in the economy, infrastructure investments could lead to a multiplier effect. He believes that strong infrastructure growth is the key ingredient to realize the vision to become Atmanirbhar Bharat.
The Indian government should consider increasing the investment funding for the NIP, National Infrastructure Pipeline via borrowings from foreign markets by the issuance of overseas bonds through an SPV, which could act as mega DFI, Development Financial Institution, stated Agrawal.
Notably, DFI could initially finance public sector infrastructure investment, and as the economy gets heated, it could also finance the private sector infrastructure projects.
Previously, governments across the globe have often used DFIs to fund infrastructure and industrial investments. Agrawal believes that technical and financial support from DFIs would help in timely and efficient infrastructure development in India.
Apart from this, overseas borrowing would also allow the Indian government to bring in diversification in its borrowings resulting in a significantly reduced dependence on the domestic market. In turn, it would leave room for the private sector to secure investment capital.
India is at a prestigious spot in the G 20 economies considering the Debt to GDP ratio of G 20 economies. The country stands at the 14th rank with a total debt to GDP ratio at 127.6%, including 55.3% as private debt and 72.3% as public debt. Moreover, India also has a sufficient FOREX reserve of 575 billion USD as of November 27, 2020.
While India is still recovering from the devastating coronavirus pandemic, the common people have certain expectations from the Union Budget 2021-2022. Some of these expectations include realignment of tax rates, housing tax breaks, a separate deduction for the coronavirus treatment, increased standard deduction, and an increase in u/c 80C deduction.
In India, the income tax exemption limit for an individual taxpayer below 60 is 2.5 lakh INR per annum. The limit has remained unchanged since the fiscal year 2014-2015. Hence, people expect that the existing tax regime exemption limit would extend to 5 lakh INR. Notably, it would also allow India to increase its people’s net disposable income.
There was some relief to taxpayers in the previous budget since it allowed them to select from the current tax administration and an alternative optional new tax regime. There is no need for further explanation that taxpayers took great advantage of the new tax regime.
“While the new tax regime had lesser tax rates, the ultimate benefit to the taxpayer was the basis the deductions or exemptions otherwise he or she was eligible to,”
– Parizad Sirwalla, Partner and Head, Global Mobility Services-Tax, KPMG Assurance, and Consulting LLP India (12).
Secondly, while owning a house is one of the most desirable wishes for people, the skyrocketing prices of houses in the metro cities and even in Tier-II cities has made it difficult for people to afford it.
A standard 30% deduction rate applies to the net annual value of the property. But to reignite the drive in the real estate sector, the market expects an enhancement in the limit of 30% to 50% standard deduction of net annual value.
Under Section 80EEA, the first-time home buyer can deduce up to 1.5 lakh INR on home loan interest payment. However, the property’s value needs to be within 45 lakh INR as per the stamp duty.
We believe that these provisions are restrictive since the property prices surge have made it difficult to purchase a home. Hence we feel there is a requirement to extend the bracket of 45 lakh INR further.
According to the KPMG report (13), at present, there are a few prescribed deductions for medical treatment for self or dependent u/s 80U, 80DD, and 80 DDB act. However, there is no specific deduction in the ACT to cover treatment costs for COVID-19 patients who are not under any health insurance cover.
Given the considerable cost in the COVID-19 treatment in government or private hospitals, a separate deduction capped up to 1 lakh INR or actual treatment expense incited by the taxpayer for self and family, which is lower be considered to be introduced under the Act. It would offer much-needed relief to taxpayers, especially when such costs are not covered under a standard health insurance policy.
Moreover, for salaried people, medical reimbursement and travel allowance exemption were done away with the financial year 2018-2019 in place of the standard deduction.
People expect to increase the standard deduction from the existing 50,000 INR to 100,000 INR per annum to keep up with the surging medical cost, further amplified by the pandemic and the fuel cost.
Lastly, the limit of 1.5 lakh INR in respect of deduction under section 80C of the income tax Act (14) for several common tax-saving investments and expenditure has remained constant for almost half a decade. While we consider the current economic scenario, increasing consumer demand is one of the top priorities for the Indian government. Hence, there is a high demand for increasing the limit to three lakh INR.
India is still defined as emerging for over three decades since 1991 is a strong indicator of the gap between its potential and reality (15).
One of India’s biggest strengths is its 1.3 billion aspirations (16), yet it has flailed investing in developing human capital. The Indian healthcare and education system’s state is depicted in ranking the latest UN Human Development report and the fifth National Family Health Survey.
While literacy is required, it is not sufficient since India only has 6.5 mean years of schooling. It fares poorly since Malaysia had 10.5 years, Brazil and China have eight years, and Korea boasts 12.2 years.
There is no way India can justify its demographic dividend spending, barely 1.5% of GDP on health and 3.1% GDP for education. It is worth highlighting that the level has been latent for almost a decade, and no economy can prosper without investing in human development.
India’s aspiration to become a 5 trillion USD economy depends on finding ways to fund it. Global interest rates are at rock bottom at 1% and negative yields.
While global pension funds and sovereign funds are hurting and looking for returns, India could align its market and potential conditions with securing resources. There is an opportunity for the country to monetize its assets and opportunities.
It is an ideal scenario where India or any other economy would want to produce a bulk of consumption demand. Moreover, the mindset of globalizers has only seen India as a market for their goods. However, suppose India could recraft land and its labor policies. In that case, it could leverage the cost economies for production and scale its domestic market to compete with compulsion and benefit from the global China+1 reconfiguration of supply chain economies.
There are also several other opportunities, including renewables, electric vehicles, and 5G services. The country could be a big market as the EV industry is enhancing to touch 800 billion USD by 2025. Its transition to 5G could also lead to another opportunity.
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At present, India hosts more than a billion mobile phone users, with about 600 million are estimated to be smartphone users. Suppose India can manage to craft a smart scheme a la the productivity linked incentive scheme. In that case, it could become a part of component commodification and gradually transit into a global hub.
The Indian economy host contrasting and extreme unemployment and jobs for which skilled people are hard to find (17). The case is the skill gap, which requires a model that allows people to earn as they learn and relearn via an apprenticeship program for newcomers and reskilling people already in the workforce.
Such a model’s requirement is quite urgent, considering the several disruptions from climate change to technology adoption. All of these could render newcomers who recently stepped out of college and have inadequate knowledge and those with jobs redundant as capital allocation for automation supplants human interference.
With the Union Budget 2021-2021, India can afford the opportunity to design a tax-based incentive scheme that can enable employers to fund skilling for job seekers to renew skills and learn a new skill.
Moreover, the recent derailment of the Jack Ma led Ant Group’s IPO (18), an action on tech firms in Europe and the US, indicates an emerging and paradigm shift in the public policy on data across political economies. These moves unquestionably ride on the perception of controlling the market monopolies and trust issues and are heading towards data localization for control, usage, storage, and monetization (19).
Such trends can have serious consequences for India. Already there are large organizations in the country, be it financial sector or factory floors, there is a rapid inducting technology for repetitive, predictive, and cognitive processes and analysis. Data is spewing because of the billion phone users, and as India aspires for prosperity, online shopping and digital transactions have made India a data-rich country (20).
Hence, it urgently needs to fix the fame in privacy and data protection and head towards a system that would enable Indians and Indian companies to first charge on data generated and gradually transit into a system to leverage data as a public good.
As we close in on the next financial year budget, in the immediate aftermath, it is natural that a lot of concentration would be on the minutiae like the percentage allocations, deficit numbers, and tax benefits.
However, the biggest question is, would the budget lay down a clear plan to tackle the five big challenges?
While slaying these giants may not include ramping up the welfare state, there are arguments that while the government is doing with the protesting farmers, a greater play of free markets would ensure an all-round property, even while others are disagreeing.
It is important to note that every political economy does and will face competing crises and contradictions. Still, the thing that matters the most is the alignment of policies and aspirations.
It is high time for India to realize its true potential and design at least a plan of action for the economy in the Budget 2021-22.