The year gone by witnessed one of the worst economic crises humanity ever faced. Strangely enough, it was also one of the most active years in terms of policymaking. The spirit in which the Union Finance Minister handled numerous press conferences assuring the anxious nation last year is expected to be seen once again on the day of the Union Budget. The zest and anticipation around the budget are always high, but the level of expectation and hope is certainly many notches higher this time.
The pandemic led to severe health and economic crises, posing numerous challenges for the government. Throughout this testing time, the approach of the government in managing the two crises has been commendable. From managing the lockdown to creating healthcare facilities and facilitating economic recovery and now rolling out the coronavirus vaccine, the government machinery has been running non-stop with efficiency and purpose.
Even as we remain optimistic in the wake of the vaccine-rollout, pragmatism lies in being cautious. The mutant variants of COVID-19 could be more contagious and pose serious risk. Thus, it is of utmost importance to remain circumspect and be prepared for all eventualities.
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Economic recovery is already underway. The Indian economy is now largely open, and normalisation of activities is being noted across sectors. The GDP advance estimate for 2020-21 puts the contraction level at 7.7%- which is on expected lines. A return to positive growth seems imminent by the end of this fiscal year. Therefore, the time is ripe to set the stage for accelerating growth in the next fiscal year.
The Union Budget will be critical in rebuilding the economy and the COVID-19 pandemic should be used as an opportunity to build back better. While the urgent requirement is to revive demand and consumption, measures for improving India's competitiveness are important for long-term sustainability and economic prosperity. The Union Budget must strike a healthy balance between short-term measures and medium-term reforms.
One of the biggest take-aways from the crisis has been the importance of innovation and the role of science and technology. Going forward, innovation, creation of new products, services and technologies will be essential ingredients for economies to remain competitive, relevant, and self-reliant. The PLI and PMP schemes announced by the government are timely initiatives to achieve India's long-term goals.
We need similar initiatives to strengthen the domestic eco-system for future growth drivers. For instance, start-ups whose businesses are based on the use of Artificial Intelligence, Machine Learning, and other future digital technologies must be incentivised.
Seamless access to robust wireless internet services would also be critical to their success. We hope to see a sizable allocation of funds to the Prime Minister's Wi-fi Access Network Interface project.
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Research and Development by businesses should also be incentivised. Studies indicate that an annual increase of 0.2% of GDP in Research & Development (R&D) investment results in an annual increase of 1.1% in GDP. India, however, has lagged significantly in this area.
Annual spend on R&D as a percentage of GDP in India pales in comparison to similar figures for the United States, China, Israel as well as South Korea. Specifically, R&D investments by industry remain low (at 41% of overall R&D spend) and need to be increased. An appropriate incentive structure can encourage greater R&D activities by the industry. A weighted tax deduction of 200% for in-house R&D facility should be re-introduced.
R&D service firms that are playing a key role towards innovation in other businesses (such as pharma, healthcare, life sciences, chemicals, electronics, etc.) should be incentivised through a lower tax regime. Corporate tax on such services may be brought down to 15% (similar to new manufacturing companies), subject to fulfilment of specific conditions such as creation of a specified number of jobs or annual foreign exchange earnings.
Lower tax regimes don't just attract financial investments in the economy. They also bring along professional expertise that can help nurture key sectors.
With that in mind, the government should invite foreign investments from the Indian diaspora worldwide, whose vast expertise in the technology sector can help nurture start-ups in the country.
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An enabling tax framework is needed, which projects India as an attractive residency option for such foreign investors. For instance, investments by the diaspora in new technology businesses in India may be allowed without attracting tax on their overseas income for a period of 10 years.
An open and stable tax regime will help attract investors, create a collaborative environment for research, foster innovation and nurture human talent that will play a key role in making India a $5 trillion economy by 2025.
(The author is President, FICCI.)