Climate Action

Union Budget 2019-20: What Should be The Government’s Focus

June 28, 2019 6:57 PM

India’s new Finance Minister, Smt. Nirmala Sitharaman will be presenting her first and India’s 2019-20 budget on 5^th July 2019. The interim budget, presented earlier this year, received appreciation for tax reductions, job creation and security, support to agriculture, support to MSMEs, aiding real estate, improving social infrastructure and bringing technology led governance aimed at inclusive and equitable growth. Thus, it may be seen as setting the guideline for future.

With Indian GDP growth rate sliding below 6% mark in the January-March quarter and unemployment rate reaching to 7.17% in May 2019, current economy is displaying signs of a slowdown, coupled with concerns over widespread joblessness. This is a serious issue that has to be faced immediately, and re-aligning the budget for 2019-20 is the right first step for the new government. While announcing the interim budget Shri Piyush Goyal remarked “This isn’t interim budget, this is the roadmap for development”.

However, for this financial year to yield true and substantial growth, final budget for 2019-20 will have to be modified to support the needs.

Suggesting Re-Alignments

Although, 2019 budget is expected to provide relief through tax exemptions, we need to understand that India has one of the highest corporate tax rates among similar economies. And combined with Dividend Distribution Tax, tax rate on corporate stands at around 50%.

Rationalizing this amount and offering breathing space to would lead to business expansion, industrial growth, job creation and economic growth. Case in point: The US recently cut down its corporate tax rates from 35% to 21%, to support business. Additionally, paying dividend distribution tax on top of hefty tax on corporate profits is unfair for businesses and relaxation on this can result in India’s growth.

Minimum Alternate Tax (MAT) is another avenue India needs to support. Current 18.5% MAT rate is very high and bringing it down to 15% would help businesses to grow.

Focus on manufacturing is also needed to increase FDI inflow within the country, create jobs, industrial growth, and improvement of life. Although, the Government has made many attempts to support manufacturing (introducing Make in India, GST, drafting National Policy on Electronics, increasing export incentives, launching phased manufacturing programme (PMP), Modified Special Incentive Package Scheme), the industry has only 16-17% share in India’s GDP. Dominating countries like China and emerging economies South Korea, Thailand have focused on scaling manufacturing capacities as it is clear how focusing on manufacturing industries can support sustainable economic growth. As trade paths with developed countries face bottlenecks (e.g- US import tariff change), focusing on manufacturing is the only way to control prices and enhance quality of products to satisfy national demand and claim untapped/emerging export markets.

Final budget for 2019 should prioritize promising industries that have shown considerable progress. Fortunately, we are now standing at the beginning of green energy revolution. And since energy and economy are inter-related, this presents ‘the’ greatest opportunity (expected to see 400% growth within 2040) India ever had to turn around its industrial, economic and social scenario through focusing on solar manufacturing.

Budget for 2018-19 was not very encouraging for the renewable and solar energy sector, and even in interim budget for 2019 Government missed out on a major opportunity to support solar. However, we need to understand that domestic solar manufacturing can offer energy security, position in the export market, and stands to save India huge amounts of money ($42 bn by 2030 from solar imports, $111.9 billion spent in crude oil import in FY 18-19), facilitating socio-economic growth. Therefore, we are all hopeful that new Government in India will set new priorities and take the right decisions in concentrating more efforts towards manufacturing within the best promising sectors for expected growth.

Here Are A Few Suggestions That Can Aid Indian Solar Industry:

• Bringing down Minimum Alternate Tax (MAT) for units operating in Special Economic Zones (SEZs) in order to increase their competitiveness. Also, commencement of production under the said sunset clause for benefits available to units operating in Special Economic Zones under Section 10 AA of Income Tax Act to be extended till 31st March, 2022.
• A recent Parliamentary standing committee report highlighted the lack of availability of funds for renewable because of the diversion of NCEF for GST compensation fund. The Government should pay heed to the Parliamentary committee recommendation and allocate NCEF for renewable energy projects in order to produce more cost efficient energy solutions.
• India already offers super-deduction of 200% of the R&D expenditure in emerging areas such as bio-technology which has led to rapid growth of Indian biotech and pharma companies. Similarly, super-deductions of 200% of the R&D expenditure for new and clean solar technology development (which could be a part of the offset / Make in India arrangement) should be allowed.
• As export growth is not taking off since last two- three years, Government should provide an increase in exports incentives for PV cells and modules.
• Providing land for solar manufacturing units on 99 years lease and low cost electricity should be provided to manufacturing units. Additional budget should be allocated to strengthen grid infrastructure since it becomes even more important with increase in share of RE.
• Additionally, special fund should be allocated for development of EV battery ecosystem. A cess on diesel should be imposed and it should be used to expand EV infrastructure in the country.
• And last but not the least, under CSR obligations for next 10 years, the amount spent by Companies on installing captive solar power plants should be allowed as deduction.

India is consistently showing positive intent towards growth. And recent policy reformations, support to industry, technology, and simplifications of inner mechanisms testify the country’s resolve. However, India needs to take aggressive and immediate decisions to move forward with the opportunities it has ahead. For that to happen, budget management is crucial. We are hopeful that final budget will add support to areas that are crucial for India’s growth in a comprehensive way, taking another step towards progress.