Striving to jumpstart an economy growing at nearly the slowest pace in a decade, India needs Finance Minister Arun Jaitley to deliver a path-breaking Union Budget – a bold statement that is visionary in scope yet granular in its objectives.
While the Indian economy has shown signs of a revival on the back of favourable global macroeconomic developments, the GDP growth momentum remains weak as investments are yet to revive.
For a government that has come to power on the promise of revolutionizing governance and pushing the economy towards recovery, this is an opportunity to take some long pending brave decisions.
Investors are waiting for the Modi government to articulate second-generation economic reforms, give a thrust to the creation of world-class infrastructure, usher in overdue tax, labour and regulatory reforms and unveil business-friendly policies.
Mr Jaitley’s last Budget was largely directional, this Budget would have to be about decisive action and a time-bound roadmap for economic revival.
Expectations are that the Budget will provide more specifics on Prime Minister Modi’s ‘Make in India’ campaign.
If successful, the PM’s global campaign to encourage investment and manufacturing in India can transform the country into an equitable and inclusive economic superpower.
The ‘Make In India’ Mantra
First, India will need to map the areas in which it has a competitive advantage over other popular manufacturing destinations like China.
At a time when China is losing its attractiveness as a manufacturing destination because of rising production costs, India can highlight the fact that the combination of a strong and stable democratic government, and the relatively free play of market forces make it a very attractive investment destination. Moreover, nearly two-thirds of India’s 1.25 billion are in their working age and that makes it an attractive manufacturing destination in terms of availability and cost of talent.
There’s a huge opportunity as an estimated 100 million jobs are expected to move out of China over the next few years in labour-intensive sectors, according to India's National Manufacturing Competitiveness Council.
The economic mess of the past several years has left India’s manufacturing sector in the doldrums. Urgent action is needed to reverse the damage.
The Budget therefore needs to spell out policies that will spur domestic manufacturing.
One of the ways to do it is by offering a weighted premium for indigenously manufactured products in government tenders. Several countries offer as high as 15-20% premium for locally-made products as part of their government procurement policies. In these countries, overseas manufacturers partner with local ones to avail of these preferential terms. It allows for technology transfers to the domestic industry which then makes the product and bids for tenders.
Such foreign collaborations can help Indian manufacturers significantly boost product quality levels and operational efficiencies, thus improving their competitiveness in global markets.
Moreover, it will allow India to strengthen its manufacturing base, provide employment opportunities to millions and build a self-reliant nation.
India also needs to improve the ease of doing business, reduce transaction costs and expedite approval timelines. It is unfortunate that India currently ranks a lowly 142nd out of 189 countries in the World Bank's 'Ease of Business' list.
One of the steps that can make doing business in the country easier, is the creation of a special cell within the Prime Minister’s Office (PMO) which will act as a one-stop shop to address the needs of overseas investors. PM Modi has already created a special Japan cell for fast-tracking investment proposals and addressing regulatory and operational impediments. This initiative needs to be expanded for other important partner countries.
Local investors should also be given access to a ‘single window’ system for securing all clearances and approvals from the various central and state agencies. The current inordinately lengthy tiered approval system should be replaced with self -attestation and time-bound ‘deemed approvals’
Enable a ‘Start-up Culture’
In order to tap the vast Indian entrepreneurial energy , the Govt needs to introduce an enabling policy environment that encourages start-ups. Special incentives and tax exemptions will lead to movement of ‘ ideas to market’ thus adding momentum to ‘Make in India’ initiative.
To transform India into a global manufacturing hub, the government will need to improve infrastructure such as port-to-inland connectivity, cargo airports, uninterrupted power, adequate potable water, effective effluent treatment facilities and well-connected roads.
Moreover, the Special Economic Zones (SEZs) policy needs better implementation if it has to boost manufacturing and exports. SEZs need to be revived and revitalized. Simplification of operational norms through self-certification and the removal of the Minimum Alternate Tax (MAT) are some of the measures that will energize this ailing sector.
Establishing smart cities and industrial corridors through high-end road and rail connectivity is also a key part of this plan.
Addressing India’s Credibility Challenge
Fundamental to this is to create a value proposition for India based on differentiation.
Strengthening the Pharma Industry
As the largest and lowest-cost producer of generic drugs in the world, the Indian pharma industry has a crucial role to play in the government’s ‘Make in India’ initiative.
The Indian pharma industry has earned the proud label of being the ‘Pharmacy of the World’ by creating a global scale manufacturing base which has made our country an indispensable and integral part of global healthcare.
It is therefore imperative that we build and strengthen this sector so that it can assume an even greater position in global healthcare. The Budget needs to give the pharma industry a shot in the arm by ensuring:
a. Support to Capital Investment:
Over the past decade, the Top 20 Indian pharma companies have invested over Rs 25,000 crores in setting up global scale manufacturing facilities. These facilities need to be further augmented through exponential capital investment in the next 10 years. Many of these past investments have been done through high-interest domestic and overseas borrowings. Foreign currency borrowings have resulted in huge liabilities on account of sharp Rupee devaluation that has hurt the balance sheets of several of these companies. Therefore, low-interest borrowings need to be made available for future investments to be made by the pharma industry.
b. Incentives to ‘Innovate in India’:
For India to retain its global leadership, investment in R&D and innovation is paramount. The 200% weighted tax deduction on R&D costs allowed to pharma companies does not permit the inclusion of international patenting and overseas drug development expenses. This tax exemption should be allowed urgently.
c. Rational approach to drug pricing:
The computation of drug price ceilings should be based on an equitable formula which ensures like-for-like comparisons and factors the quantum of investments by pharma companies in creating world-class infrastructure. If pharma companies are prevented from deriving reasonable return on investments (RoIs), a draconian pricing policy will erode huge value for this all-important sector and make business unviable.
d. Incentives for Manufacturing:
Unlike other sectors, the pharma industry needs international regulatory approvals before it can export drugs and drug ingredients. The approval process takes an average of two years, denying all Pharma Units in SEZs the benefit of a tax holiday in that period. To address this anomaly, pharma SEZs should be allowed to avail of the tax holiday only after obtaining the required regulatory approvals. Additionally, the government should also consider the exemption of duties and taxes on domestic sales of essential drugs from SEZs.
e. Increase in Healthcare Spending:
This Budget also provides an opportunity for the government to signal its commitment to universal health coverage. India needs to urgently raise public healthcare spending to at least 2.5% of GDP from only about 1% currently. Moreover, it needs to create a highly effective, sustainable, technology-based universal healthcare system that emphasises individual responsibility for health supported by enabling state policy.
The prospect of a reforms-oriented Budget has already started reflecting in market sentiments with the Sensex hitting record highs.
To live up to investor expectations the new government needs to introduce enabling policies as well as build the necessary infrastructure that supports the development agenda for the country across sectors.
This Budget is a golden opportunity for the government to usher in the promised “acche din (good times)” which will attest to the reformist credentials of the Narendra Modi-led government.
Kiran Mazumdar –Shaw, CMD Biocon