India's fiscal deficit is expected to improve naturally and the government should focus on supporting the economy through its capital expenditure in face of geopolitical developments and concerns of unemployment, says Sanjeev Agrawal, President of PHD Chamber of Commerce and Industry.
In an interview with Outlook Business, he said, "I believe the ratio of fiscal deficit will automatically become benign. Now, for the current year, we will be comfortable because we are better than many economies in the world economic system. Fiscal deficit becomes problematic where there is no growth."
Discussing his anticipations for the forthcoming Interim Budget, Agrawal also highlighted various concerns affecting the Indian economy.
Below are the edited excerpts:
What major announcements are you expecting in this Interim Budget?
We anticipate notable initiatives from the esteemed Finance Minister, particularly given India’s current status as a key driver of global growth. Our expectation for this budget is a specific push to the manufacturing sector. We would highly value an extension of the PLI scheme, extending beyond the existing 14 sectors designated by the government.
The scheme should be extended to sectors such as the garment, jewellery, and handicraft industry. These sectors are particularly labor-intensive, with a significant workforce employed. The extension can have a direct and positive impact on employment generation. Another expectation would be a specific focus on the tourism sector. Recognising the potential of tourism to drive employment will also be highly appreciated.
Besides, we also expect the government to focus on multi modal transport system because of India’s largest network of roads, and FDIs (Foreign direct investment). Investment is coming to India, but the flow has to be sustained, and therefore, we believe that the state governments should also be equally responsive to it.
And last, but not the least, India's transition towards green energy as we need cheaper rates for green financing to become globally competitive. And also the housing sector, which can boost the economy with a lot of employment generation.
If government focuses on these areas then I think it will be very good for India.
Amid all these expectations, which particular sectors or industries you identify to stand first in line to be directly benefited from the Budget?
I think it would be extending the PLI scheme because of the employment generation and value added to the economy. And secondly, since India has committed to reduce the carbon emissions by 45 per cent by 2030, green financing needs to be prioritised. There has to be some special rates for green financing, so there can be a smooth energy transition.
Economists have flagged unemployment to be India’s major challenge. Do you think PLI schemes alone can resolve this issue, or some extra effort is required?
The government has clearly set the priorities. If you talk of India, we are primarily an agriculture based economy. Numerous reforms have been implemented in the agriculture sector, and I believe most of them are in place except those three that were taken back. It only now remains a matter of time for things to get sorted.
Second is the manufacturing sector, where there has been the implementation of PLI schemes, as we have discussed.
Third will be the infrastructure push. When you invest in infrastructure, you automatically generate a lot of employment, right? I think these are the initiatives that the government has taken to resolve the issue.
The government has been augmenting its capital expenditure to attract private investments within the country. As it is committed to reduce the fiscal deficit to below 4.5 per cent, when do you believe the intervention will no longer be required to stimulate economic growth?
Increasing private investment is an ongoing process. The only thing where we need to focus is on ease of doing business. If you talk about cost of doing business, there are two major things. One is the logistics cost. Second is the cost of finance and simplifying the processes of acquiring the approvals for various things that the industry needs at the time of starting a business or while doing a business with GST.
Most of the things have been sorted out in terms of tax. Now the services are needed to be digitised to increase effectiveness. And third is the judicial delivery system. If courts at district level are also digitised like they have done in Supreme Court and High Court that will really reduce the cost of doing business.
Decriminalisation of laws is also very important, so that people are not too much scared of minor technical errors that are part of doing business. These are some of the things that need to be streamlined.
And how do you think the government will strike a balance between fiscal consolidation and increasing capital expenditure to support growth?
The government has created a great balance in the last many years. After the COVID period, fiscal deficit was actually very high. Now it is coming down year after year, and the current year target that is 5.9 seems very much achievable. Even in worst case, it will not be more than 5.9 per cent.
But when you say the capital expenditure is also high, I believe it is more important because we have to support the economy in this difficult time. There are geopolitical developments and we have recovered from the COVID. But still we have to support the economy with capital expenditure. And we have to create the employment opportunities for our population. That is why we cannot compromise only on the macro numbers of fiscal deficit.
I believe the ratio of fiscal deficit will automatically become benign. Now, for the current year, we will be comfortable because we are better than many economies in the world economic system. Fiscal deficit becomes problematic where there is no growth. If you are growing and you are growing in the higher trajectory, then your fiscal deficit also supports you in terms of creating conducive conditions for business and the youth.
Since we are still recovering from COVID and have responsibilities such as addressing the economic imbalance and energy transition, where would you think the prime focus will be between recovery, sustainability, and populism?
All three are definitely very important. There is a need to be a collective focus on all these. There cannot be a single priority. But because India is an emerging economy with poor people who need to be supported, welfare needs to be the first priority.
Second of course, can be sustainability because we have only one earth to live. So therefore, sustainable development needs to take place. Here, I think the role of developed countries is also extremely important because they need to give money for financing these sustainable technologies. That was also discussed during our G20 meet. And this is what is expected. These all are very important questions and points where the government is focusing on.
It has created a very good balance among all the priorities that you have discussed.
Can we expect any significant tax reform like the one we had in 2019?
Yes, I am expecting some reforms in direct taxation because that is still problematic. We are taxing the middle class in the middle of their incomes. I think 15 lakh is the income of a middle class and we are taxing them at the peak rate of 30 per cent. That should not be the case.
The peak rate at least should not be imposed below the income of 25 lakh, because many economies are taxing people at very high level of incomes. That is why my connotation and my suggestion is that if we provide some relief to the middle class, it will support the economy in terms of increased consumption and demand. And that will be the scenario of manufacturing when they buy the goods and services from the system.
