Budget 2022: Light at the End of the Tunnel or Dark Clouds for MSMEs?

The Union Budget 2022-23 highlighted that the Micro Small and Medium Enterprises (MSME) sector is a vital pillar of the country’s economy. It contributes to approximately 45 per cent of India’s total manufacturing output, 40 per cent of exports, and almost 30 per cent of the national GDP. The COVID-19 pandemic proved to be a major blow to the sector, especially to the small enterprises as they were abruptly forced to get on the tech wagon.[1] The unforeseen and instant digitization resulted in mounting costs at a time when they could barely sustain themselves. In light of this, the sector put their faith in the Union Budget for the FY 2022-23 for support, recovery and development.

Expectations of the MSME Sector from the Budget 

 

Previously, the government had introduced the Emergency Credit Line Guarantee Scheme (ECGLS) to provide support to the micro, small and medium enterprises amidst the pandemic. This led to an increase in the expectations of the MSME sector from the 2022 Budget. They anticipated that the government would provide benefits such as simplifying taxation procedures, credit lending, and investment incentives.

 

Changes in the Credit Framework

 

Under the aforementioned ECGLS scheme, MSMEs enjoyed a reduction in the interest rates on the loans and an enhancement in the loan procurement process.[2] This was well-received as it helped the MSMEs to recover from the clutches of the pandemic. 

It is pertinent to note that occasionally the  MSMEs have to extend their credit lines and bear the brunt of delayed payments.[3] This adversely impacts the growth of their business. Due to this, they need measures to facilitate their business decisions by improving the credit lending framework.

Due to the pandemic, a number of MSMEs were unable to utilize the benefits provided by the government. This was primarily because, either the enterprises weren’t registered as MSMEs or they did not have a secured bank account.

The cash flow was also largely impacted by COVID-19. To minimize the challenges put forth by this issue, provisions for banks to lend more to MSMEs were required. This in turn would have ensured a steady supply with the NBFs and would have further enabled them to lend credit to MSMEs.

Further, it was expected that the Special Credit Linked Capital Subsidy Scheme, which was announced in 2021, would extend to enterprises with a turnover of fewer than 5 crores. The institutional credit provided under the scheme would have allowed the smaller enterprises to procure equipment for their technological development.  Ergo, certain key changes were expected in the credit framework. 

It had also been suggested that retail loans to MSMEs should be treated differently from corporate loans.[4] This suggestion came in light of the Reserve Bank of India’s notification in November, where it clarified its asset classification norms. Under this notification, the RBI asked the lenders to classify the borrower accounts as a Special Mention Account (SMA) and a Non-performing Asset (NPA) as per the day-end process.[5]

The budget was also expected to come to grips with the problem of willful defaulters and rising NPAs in the given sector by introducing appropriate policies.

 

Reduction of Taxes

 

The government was expected to provide a considerable reduction in duties and taxes. This would have encouraged the MSMEs to invest more in capital goods and in turn produce more. To further tap the manufacturing capabilities of the MSME sector, it was suggested that the Long Term Capital Gains Tax on Private Equity should be reduced. Additionally, more subsidies should have been introduced on the imports of Capital Goods.[6] The MSMEs also hoped for GST rationalization and some relaxation in the compliance burden. This would have helped in increasing the ease of doing business.[7]

 

Incentives for Investment

 

For the inducement of investment in the sector, the MSMEs pinned their hopes on the government to provide incentives such as tax benefits for the angel investors and contrive a policy to ensure that the sector is adequately funded.[8]

 

Steps Towards Digitization

 

Furthermore, it was suggested that the government should have aimed to bring the digital revolution in the backward areas as well.  For this, the government should have promoted digital payments through certain incentives. Further, it was expected that the government would provide technological solutions to enable the MSMEs to increase their production and compete better.

 

Other Incentives

 

To address the environmental concerns, steps to promote low carbon manufacturing among the MSMEs were awaited. The 2022 Budget was expected to provide support in this regard. This would have provided the Indian economy to tackle environmental concerns as well as enable the  MSMEs to explore innovative solutions.[9]

 

Budget 2022: A Beacon of Hope for the MSME Sector? 

 

In the 2022 Budget, critical factors concerning MSMEs were targeted. These include raw material, credit access, and input costs. Further, infrastructure and skill development support, digital services support, ease of doing business was assured and facilitation of ease of doing business was announced.

 

Input Costs

 

A reduction in the import tariffs on inputs was announced along with an increase in the tariffs on the import of end products. This would protect the MSMEs and make them more competitive. While there was a reduction in tariffs including customs duty and exemptions on input like steel scrap, a 7% duty on finished goods was announced. Further, the import tariffs for industries like textiles, leather products, and handicrafts were also reduced. Lastly, the steel scrap customs duty exemption, which was given last year has been extended for another year, providing relief to MSME steel producers.[10] Moreover, certain anti-dumping and countervailing duty on stainless steel and coated steel flat products, bars of alloy steel and high-speed steel were revoked in larger public interest considering prevailing high prices of metals. On the other hand, customs duty on umbrellas was raised to 20 per cent and exemption to parts of umbrellas was withdrawn. 

Removal of exemption on items which are or can be manufactured in India and providing concessional duties on the raw material that goes into the manufacturing of intermediate products will go many a step forward in achieving our objective of ‘Make in India’ and ‘Atmanirbhar Bharat. 

 

Access to Credit

 

The MSME sector would now be facilitated with an additional credit of Rs 2,00,000 crore under the credit guarantee scheme. The Emergency Credit Line Scheme has been extended till March 2023 and an increase in the guarantee cover has been announced, from Rs 50,000 crore to Rs 5,00,000 crore with an exclusive cover earmarked for hospitality.[11] Moreover, an announcement of the use of the post office infrastructure for 1.5 lakh additional physical banking facilities was made. Additionally, it was announced that 75 remote rural districts would now have digital banking units set up by commercial banks.[12] Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will be revamped with funds infusion. This will stimulate additional credit of INR 2 lakh crore for MSEs and boost employment opportunities.

 

Infrastructure

 

Investments in multi-modal logistics parks and cargo terminals under the Gati Shakti scheme would facilitate domestic as well as global market connectivity. Thus, bringing down the cost of logistics for the sector and boosting export competitiveness. 

 

Start-ups

 

An announcement pertaining to the rationalization of capital gains surcharge was made, boosting the growth of startups. Individuals and FPOs would now be strengthened through the NABARD initiative.[13]

 

Skill Development

 

The national skill qualification framework will be oriented as per the varied industry needs. Hence, a positive initiative to bridge the gap of skilled human resources within the sector. 

 

Digital Services for the MSME Sector

 

The Union Budget 2022 declares that Udyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals will be interlinked, and their spectrum will be broadened. They will now serve as portals with live, organic databases, delivering G2C, B2C, and B2B services. These services will relate to credit facilitation, skilling, and recruitment to formalise the economy and improve entrepreneurial opportunities.

 

Efficiency and Competitiveness

 

For MSMEs to become more efficient, the Racing & Accelerating MSME Performance (RAMP) program with the outlay of Rs 6000 crore over 5 years will be rolled out, It aims to help the MSME sector to inculcate factors such as resilience, competitiveness and efficiency.

 

Surety Bonds in Public Procurements 

 

To reduce indirect costs for suppliers and work contractors, the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurements.

 

Concessional Corporate Tax 

 

Extension of the concessional corporate tax rate of 15 per cent by one more year — till March 2024 for newly incorporated manufacturing companies has also been rolled out. 

 

PLI for Solar PV Module 

 

Budget 2022 allocated an additional Rs 19,500 crore to boost the manufacturing of solar PV modules under the production linked incentive scheme. This is to facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar energy capacity by 2030, an additional allocation of Rs 19,500 crore for Production Linked Incentive for manufacturing of high-efficiency modules, with priority to fully integrated manufacturing units from polysilicon to solar PV modules, will be made.[14]

From the above discussion, it can be seen that the 2022 Budget did oblige with the expectations of the MSME Sector. There was an increase in the budgetary allocation for the given sector. The 2022 Budget successfully addressed certain key issues such as the lacuna in the credit framework, deficiency of infrastructure, etc.

However, at the same time, it neglected a number of key issues. It ignored the needs of the unregistered MSMEs, which almost comprise 90% of the sector.[15]Further, there was a reduction in the funds allocated to key schemes. There was no allocation under the 2022 Budget for the  Credit Linked Capital Subsidy and Technology Scheme. Further, a cut of 75.56%  has been made in the Technology Upgradation and Quality Certification.[16]

The Budget failed to go beyond the schemes while exploring ways to increase the infusion of capital in the sector. In spite of the existing schemes, many enterprises are still struggling to sustain themselves. Therefore, an additional boost should have been provided by the government. 

The government also failed to tackle increased unemployment in the sector. No measures were taken to extend the benefits of the Insolvency and Bankruptcy Code to proprietorship firms. This was a serious drawback as the government failed to take the interest of more than ninety per cent of MSMEs into account amidst the pandemic.[17]

 

Some Hits Some Misses

 

The pandemic severely disrupted the MSME sector and in effect, the economic output of the country. The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan. Even though financial assistance extended during the pandemic did resolve the immediate sustenance issues, mounting loans and additional dues are some issues that need immediate redressal. Thus, it can be seen that India still needs a holistic approach to foster the growth of MSMEs, particularly the ones reeling under the debt of the pandemic.

References:

[1] https://economictimes.indiatimes.com/small-biz/sme-sector/why-technology-is-the-only-path-to-sustainedgrowth-for-msmes/articleshow/80281133.cms

[2] https://www.eclgs.com/

[3] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[4] https://www.financialexpress.com/industry/sme/msme-eodb-msme-budget-2022-expectations-three-key-areas-experts-say-fm-nirmala-sitharaman-must-address/2417204/

[5] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/117MCIRACP41D584957C3A43BCACEBC391B91A3FA0.PDF

[6]  http://www.businessworld.in/article/Expectations-Of-The-MSME-Sector/28-01-2021-370928/

[7] https://zeenews.india.com/economy/budget-2022-expectations-msmes-hope-for-gst-tds-reductions-relaxation-in-compliances-2429221.html

[8] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[9] https://indianexpress.com/article/business/budget/union-budget-2022-expectations-live-updates-what-market-experts-companies-industry-bodies-india-inc-economists-expect-7738854/

[10] https://economictimes.indiatimes.com/small-biz/sme-sector/govt-reduces-customs-duty-on-certain-steel-items-to-provide-relief-to-msmes/articleshow/80630835.cms?from=mdr

[11] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-eclgs-extended-to-march-2023-total-cover-up-to-rs-5l-crore/articleshow/89266189.cms?from=mdr

[12]  https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf 

[13] https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf

[14] https://knnindia.co.in/news/newsdetails/msme/msme-minister-launches-integrated-services-of-udyam-registration-portal

[15] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

[16] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-budgetary-allocation-rises-for-msmes-but-some-key-schemes-see-a-cut/articleshow/89276388.cms

[17] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

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Image by eko pramono from Pixabay 

The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan.

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Government Incentives for Infrastructure Development

India is emerging to become a global leader in investing in world-class infrastructure projects, in view of concrete plans set out in the 2021 Budget. With unwavering growth in the Indian stock market witnessed by indexes touching unprecedented highs, the Indian infrastructure sector is filled with signs of optimism as the country reels out from the effects of the pandemic. Current trends suggest a boost in infrastructure spending that shall also facilitate infusion of overseas capita for investments in other sectors and an availability of credit for infrastructure projects.

The government’s National Infrastructure Plan for 2019 to 2025 has already supported more than 9000 projects having a total project cost surpassing USD 1949 billion.[1] The National Infrastructure Pipeline is a live database of infrastructure projects and provides attractive investment opportunities in projects worth more than INR 100 crores in sectors including Transport, Logistics, Energy, Water and Sanitation, Communication, Social and Commercial Infrastructure.[2]

 

Apart from this, opportunities are available through the government’s ‘India Investment Grid’ (IIG) for investing in stressed assets to allow the purchase of viable stressed assets which have the potential for being turned around.[3] IIG also facilitates Corporate Social Responsibility opportunities for businesses to invest in infrastructure building in the education, healthcare sectors and for poverty alleviation as part of their CSR spending.[4]

These investment opportunities are coupled with a bold move towards introducing National Bank for Financing Infrastructure and Development Act, 2021. The long-overdue initiative establishes a government-owned Development Finance Institution (DFI) for extending long-term affordable debt financing to infrastructure projects. The DFI is set to receive initial funding from the government and is projected to have a lending capability of a minimum of INR 5 trillion by 2024-25. The appointment of the veteran banker, Mr. K V Kamath as the chairperson of the newly set up INR 20,000 crore DFI- National Bank for Financing Infrastructure and Development, falls in alignment with the developmental and financial objectives of DFI.

The INR 40, 000 crore National Investment and Infrastructure Fund (NIIF) anchored by the Government of India in 2015 is also gaining momentum through its funds namely, Master Fund, Fund of Funds and Strategic Opportunities Fund each with a designated purpose.

 

Impetus has been given to the domestic manufacturing ecosystem through the Atmanirbhar Bharat initiative, especially to Micro, Small and Medium Enterprises (MSMEs) aiming to facilitate local manufacturing. As a further boost to the initiative, the government intends to achieve a turnover of US$ 25 billion including export of US$ 5 billion in aerospace and defense goods and services by 2025[5]. An increase in the capital expenditure will augment the procurement of weapons, aircraft, warships, and other military hardware. Posing as a lucrative market for defense companies, India gives orders worth US$ 100 billion a year for defense procurement.[6] Therefore, the Finance Ministry has permitted Foreign Direct Investment (FDI) in the defense for sector up to 74 percent under the automatic route leading to access of modern technology, strategic partnerships between foreign manufactures and defense equipment manufacturers in India. It also promotes active utilization of the Technology of Funds scheme that supports MSMEs in catering to the requirements of technological development in the defense sector.  

 

With a capital infusion of INR 1,000 crores to Solar Energy Corporation of India, there is a likely surge in large-scale solar installations, grid-connected projects, solar plants, and solar parks along with a phased manufacturing plan for solar cells, solar panels, and domestic production of solar inverters and solar lanterns.

 

The Government of India has also earmarked areas including highways, railways, power grids, and airports to monetize public infrastructure for financing new public projects. Statutory authorities have already begun setting up infrastructure investment trusts (InvIT) which will hold the public infrastructure assets for national as well as international institutional investors. Another avenue under consideration for obtaining public investment into infrastructure projects is issuance of tax-efficient zero-coupon bonds by infrastructure debt funds.

 

Major tenders worth more than INR 20 billion are expected to be issued in the coming financial year for public-private partnership in the management and operations of ports.

 

The logistics sector serves national trade, international trade, MSMEs, and start-ups. The launch of INR 100 crore Gati Shakti National Master Plan for Multi-Modal Connectivity has heralded new possibilities. This digital platform will incorporate the infrastructure schemes of various Ministries and State Governments like Bharatmala, Sagarmala, inland waterways, dry/land ports, UDAN etc; Economic Zones like textile clusters, pharmaceutical clusters, defense corridors, electronic parks, industrial corridors, fishing clusters, Agri zones will be covered to improve connectivity and make Indian businesses more competitive[7]. The National Logistics Policy is expected to promote seamless movement of goods through a focus on digitization, process re-engineering, multi-modal transport, EXIM trade, etc.[8] It is designed to streamline rules and address supply-side constraints, leading to lower logistics costs, the boost of trade, enhancement of Logistics Performance Index and greater competitiveness for Indian products worldwide.

 

In the power sector, apart from an INR 3 trillion outlay planned over the coming five years for revamping the power distribution scheme by providing distribution companies with financial assistance for developing a smart-metering infrastructure, the government is also in the advanced stages of launching a National Hydrogen Mission which may provide an opportunity for corporations in the power sector to engage in the export of green hydrogen and green ammonia while also meeting the domestic demand.

 

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

 

Fox Mandal’s Infrastructure, Project Finance, and Energy Teams deliver unmatched expert services in wide-ranging areas of public infrastructure, inclusive of but not limited to ; transaction assistance for infrastructure projects, services of review, compliance, submitting tender documents, structuring and reviewing concession agreements, incorporation of Special Purpose Vehicles (SPVs), procuring relevant licenses and approvals, regulatory clearance facilitation, dispute resolution, strategy planning, and infrastructure contract bidding management.

 

As a commendation for the services rendered by Fox Mandal, the Firm featured in 2021 Legal 500 Rankings for its Projects & Energy Practice vertical.  

 

References: 

[1] https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[2] https://indiainvestmentgrid.gov.in/opportunities/nip-projects/transport and https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[3] https://indiainvestmentgrid.gov.in/opportunities/stressed-assets/transport?subSector=112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[4] https://indiainvestmentgrid.gov.in/opportunities/csr-projects?sector=29%2C10&subSector=97%2C99%2C157%2C94%2C100%2C93%2C102%2C105%2C96%2C95%2C103%2C104%2C98%2C112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[5] https://www.investindia.gov.in/sector/defence-manufacturing

[6] https://www.business-standard.com/article/economy-policy/higher-fdi-in-defence-sector-to-attract-mncs-give-make-in-india-a-boost-120051900698_1.html

[7] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1763638

[8] https://www.thehindubusinessline.com/opinion/logistics-and-supply-chain-trends-for-2021/article36366467.ece

 

Image Credits: 

Photo by David Rodrigo on Unsplash

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

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Unshackling the Education Sector - A Surefire Way to Accelerate Development

“Education is the most powerful weapon which you can use to change the world”, said former South African President Nelson Mandela. I believe his prescient observation is timeless in its relevance. In the world that we live in, there are two major factors that will shape how education will be consumed in the future. The first is the reality of ever-increasing digitization. The second is the huge changes to lifestyles forced upon us in the wake of the COVID-19 pandemic.  

In many ways, these two are closely intertwined in the context of education. We as a nation today stand on the threshold of a historic opportunity to transform our education system. The New Education Policy has set the ball rolling, but much more needs to be done to enable our institutions to deliver the kind of education that our nation needs. This is especially true for higher education. We have hundreds of universities and higher education institutions (HEIs) that cater to the entire gamut of academic fields. But the fact that even the best of our HEIs do not rank among the top 100 globally is telling. By comparison, several Chinese universities do- and have got there only in the past decade.  

Innovations around the world, powered by digital technologies, are enabling better remote teaching and learning experiences. In India, mobile/internet penetration is increasing rapidly and becoming ever more affordable. Together, these are powerful forces of change. For many courses, virtual classes can easily be conducted by teachers from their homes- provided they are equipped with the right digital infrastructure. Students too can attend these classes from the comfort of their homes. Of course, for certain courses such as Medicine, Engineering, Agriculture, etc. it may not be possible to fully replicate the experience of a laboratory or a field- although I think sooner rather than later, Augmented Reality will enable even this gap to be bridged. This means that unlike in the past, universities and HEIs no longer need large areas of land to build physical classrooms or other on-campus facilities. 

Given India’s legacy of teaching in English and the relatively lower fees and costs of living, our universities have, for the past many decades, attracted students from Africa and Middle Eastern countries who pursue various undergraduate and post-graduate degrees. To be fair, some of this is also the result of “education diplomacy”. Why not take advantage of this and work towards making India the education hub of the world for the new era? Given India’s own linguistic diversity and the needs of foreign students, multilingual support too can be provided digitally, to improve learning outcomes and hence increase the attractiveness of our HEIs.  

We have the talent to develop the right curricula and teaching methods. Just a few weeks back, Ranjit Disale, a government school teacher from Maharashtra won the Global Teacher Prize for his revolutionary contributions to the education of girls by leveraging QR code technology. There must be hundreds of other teachers in our HEIs with innovative ideas on how to enhance learning efficacy in their subjects.  

If asset-light, “virtual-only”, for-profit HEIs are permitted, private capital will more legally and transparently be attracted to the education sector. Investors such as PE funds will be more willing to fund the development of next-generation technology-based delivery infrastructure, hiring quality teachers, and development of new, digitally deliverable content that enables students to develop core knowledge as well as critical thinking skills and gain exposure to emerging fields that will become more and more important for India and the world. These knowledge assets can be used to scale up the education venture, thus lowering the risk for capital providers.  

 

Allowing asset-light virtual universities to be established in specific disciplines will also address the challenge of a shortage of qualified and motivated faculty. By allowing faculty to teach courses on multiple platforms, even students affiliated with different HEIs can get access to top-notch teaching. Digital content can be updated more easily, without the costs associated with printing, distributing, and updating physical textbooks. 

Naturally, such a massive transformation will need a radical change in the mindset of parents, teachers, and students. It will also need changes to the laws that govern the country’s education sector. Under India’s Constitution, education was originally a State subject. In 1976, the 42nd Amendment transferred some aspects to the Concurrent list. Visionary state governments can take the lead in amending the necessary regulations or enacting new legislation so that the education sector is able to attract adequate capital and has the ability to innovate around new courses, curricula, delivery models, testing mechanisms, etc.  

The pre-condition that Universities/HEIs can only be permitted when those who wish to set up such institutions have adequate land available is a major structural impediment. This is especially true for courses where there is no need for laboratories or hospitals etc. Per prevailing law, even private education institutions in India are supposed to be “non-profit”. But the reality is very different- and this is what breeds corruption. Trusts are set up to acquire large land banks on the outskirts of cities ostensibly to establish a school or college/university campus. The funds used to acquire these large tracts of land sometimes have questionable provenance. If the HEI clicks, well and good. If the institution does not gather the desired traction, that’s no big deal either. Over a period of time, these land banks are used for commercial or residential projects.  

In cities that have grown rapidly in the last decade or two (Bangalore is an example), educational institutions whose campuses were established say 20 years ago, are now located in the middle of the metropolitan area. These institutions shift to new areas on the outskirts. The prime real estate thus freed up in the city centre is used for other projects. In some cases, developers build a school as part of a large gated community, thus seeking to satisfy the conditions of land grant or conversion.  

Such new-age virtual universities can benefit students from India as well as overseas and allow underprivileged students to access high-quality education. Even in the current setup, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

 

Image Credits: Photo by Mohammad Shahhosseini on Unsplash

Even in the current set-up, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

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Atmanirbhar Bharat needs to harness the right strengths through a New Governance Architecture

Achieving the goal of an Atmanirbhar Bharat depends on two other factors in addition to the need for changes to various laws and a mindset change in our people (which I have written about in my two previous blogs). The first is harnessing India’s diversity in terms of natural and human resources and our rich civilizational traditions that, in many ways, are becoming relevant again. The second is to strengthen India’s federal governance structures in order to enable the first. 

India as a nation has abundant mineral wealth, that, if tapped sensibly, will secure critical supplies to vital industries. Developing our own local sources reduces the dependence on imports, thereby partially insulating our economy from a range of geopolitical and other risks. India’s wide variety of soil types and climatic conditions are capable of supporting a range of food crops as well as cash crops. Our country’s rich biodiversity endows us with a number of indigenous plant and animal species. Many plants that are native to India have proven medicinal value. Plant extracts like saffron are in great demand worldwide, and through proper scientific cultivation, can be grown in more areas.  

Almost every state is home to some traditional art or craft, whether textiles, dyes, toys etc. As the world becomes more conscious of the need to act against climate change and protect the planet, there will be a demand for green, sustainable products. Bamboo toothbrushes and bottles are a good example. Several north-eastern states can grow enough bamboo to make such products- not just for India but also for exports. A similar opportunity exists with Indian fabrics made of say tussar silk or fine cotton or pashmina yarn.  

The concept of Atmanirbhar Bharat is not about becoming an insulated island in a global economy; it is about optimizing self-reliance. Even in the future, we as a nation will continue to import a wide range of products and services simply because we do not have the comparative advantage to make them: it is cheaper to import them. But in the years ahead, we must minimize this list of imports so that there is minimum strategic dependence on key materials, whether natural resources or other components and intermediates.  

India has a strong base of human resources skilled in STEM disciplines. But many of our graduates who are keen on the research end up doing cutting-edge work in overseas labs. Why can we not create a domestic ecosystem that enables our scientists, engineers, and technologists to conduct similar levels of advanced research in India and allow domestic companies to commercialize the research to create products and services for the world? The new education policy is a step in the right direction, but more needs to be done to unshackle higher education and encourage private R&D and innovation in key fields. In fact, public-private partnerships in R&D can be quite fruitful.  

In my view, it is possible to do all this, but to do so with impact and in a sustainable manner, we need to rejuvenate our governance structures. The founding fathers of India envisioned a strong federal structure where central and state governments will work symbiotically and in complementary ways towards the overall purpose of India’s progress. For a number of reasons, this intent of our federal government system has weakened over time. The tendency of central and state governments to often lock horns (unless the same political dispensation is in power) needlessly wastes valuable time and other scarce resources. In most states, continuity of policies does not depend on their merit or impact; very often, policies introduced by one party’s government are decried and rolled back or tweaked when another party comes to power. This is not right, because every government implements some good policies for sure. Irrespective of which political party is in power, the central government and state governments should work in harmony.  

While the central government policies must aim to create a national-level competitive advantage for various sectors (through the right policies), state governments should work towards giving a thrust to industries that are important to India and can thrive locally within their jurisdictions. individual states must learn to utilize the legislative flexibility given to them under our constitution to make themselves most attractive to investors. This will necessarily mean that states will need to compete with one another, but that’s the only way they can accelerate social and economic development. Pegatron, one of Apple’s key OEM manufacturers, recently announced its intent to set up a production facility in India. I read a recent news report that both Karnataka and Tamil Nadu are offering incentives to get Pegatron to choose a location in their state. Similarly, UP has announced a policy to attract new data centres that come up.  

It is not that states are not doing this. But I do not think they are doing it well enough. Often, states compete on the basis of tax breaks or land at lower prices or single-window clearances, etc. But the business case of investing companies typically considers many more factors beyond just the ease of setting up a factory. While this criterion is undoubtedly important, depending on the nature of business, natural resource availability, availability of skilled human resources and infrastructure (power, water, multimodal transport options etc.) are also important considerations. The quality of housing, school/college education facilities, entertainment avenues, lung space, pollution levels, overall law and order situation etc. are also critical elements of the business case because these factors collectively go a long way in determining whether companies can attract top-quality talent, the levels of compensation needed and how easy it will be to retain staff.  

Also, some of these incentives can easily become a slippery slope because smart investors will start playing one state against another. For states to develop a stronger and more comprehensive “pull” factor, the quality of their policies and the degree of innovativeness they show will be key. This means that officers who understand the big picture will inherently be more flexible and responsive to the needs of investors, provided they are not impeded by political pressures of various kinds. States whose leadership consciously works towards quickly creating such a development-oriented culture within government will undoubtedly benefit much more than those states that continue to operate in the old way.  

In the context of the preceding analysis, I see three distinct clusters of sectors where we as a nation should focus in the next five years to create a global scale: 

  • those in which we have become strong global players in the past 20 years (pharmaceuticals, chemicals, steel, IT, automotive, textiles etc.)- we can build on our advantages. 
  • those that are part of our ancient tradition, but are finding new takers worldwide (Ayurveda and other ancient systems of medicine, yoga, environmentally-friendly dyes, weaving etc.)- we can leverage our rich tradition and present them in a modern context using better manufacturing, packaging and branding.   
  • those that are emerging as the new arenas of global competition (space and satellite technologies, remote sensing, AI-ML, robotics, 5G, IoT, cognitive computing, genomics, biotechnology etc.)- this is where we can harness the diversity in our human resources to emerge as leaders in what will essentially be the key fields of the future.  

Higher Education, in my view, is another large opportunity that India can benefit from. The pandemic has proved that with the right technology, virtual teaching and learning are possible. Naturally, the right teacher, training and content, along with further advances in technology, will help raise effectiveness further. With this in mind, allowing virtual universities to be established in various disciplines will help students from India and outside get access to a top-notch education. Of course, this will need a radical change in the laws that govern education.  

A sustainable Atmanirbhar Bharat depends not just on a large and growing vibrant domestic market, but also on our ability to become an export hub that caters to global demand by producing top quality products and delivering cutting-edge services (including education). This is the only way we can build a robust economy that not only delivers the levels of employment and GDP growth but is also better prepared to cope with shocks and slowdowns that may occur in the future. After all, there’s a good reason why twin-engine aircraft is preferred, why world-class batsmen can play both on the front- and back foot, why archers have a second string to their bows or indeed, why it is recommended that we should not put all our eggs in one basket. 

Image Credits: Photo by Balaji Malliswamy on Unsplash 

A sustainable Atmanirbhar Bharat depends not just on a large and growing vibrant domestic market, but also on our ability to become an export hub that caters to global demand by producing top quality products and delivering cutting-edge services (including education). This is the only way we can build a robust economy that not only delivers the levels of employment and GDP growth but is also better prepared to cope with shocks and slowdowns that may occur in the future.

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Income Tax Relief for Developers and Residential Home Buyers To Boost Real Estate Sector

In a bid to provide an additional boost to the economy, as well as the home buyers, the Union Finance Minister – Nirmala Sitharaman, has announced a new stimulus package under Atma Nirbhar Bharat 3.0, on November 12, 2020.  As per the announcement, the acceptable difference between the ‘circle rate’ and the ‘agreement value’ for residential properties has been hiked from the existing 10% to 20%. The tax sop announced is expected to provide relief both to Developers as well as to Buyers, on the notional gains on which income tax is paid by them. The relief, which has been made effective from November 12, 2020, and will be applicable until June 30, 2021, is applicable only on the primary purchase of residential unit of value up to Rs. 2 crores.

What is Circle Rate?

 

Circle rate is the minimum rate per square foot for land or property fixed by the Government. State governments publish area-wise rates of properties, on a yearly basis, known as ‘Circle Rates’ or ‘Ready Reckoner’ rates or ‘Guideline Values’. Any difference between the Circle rate and the Agreement value beyond the acceptable rate [i.e. 10%, now increased to 20%], is taxed as “income from other sources” u/s. 56(2)(x) of the Income-tax Act 1961 (“the Act”). Accordingly, a Buyer of such property would be required to pay tax on the difference, at the applicable slab rates. Further, in the case of a Developer, under the provisions of section 43CA of the Act, the ‘sale consideration’ of such a property is deemed to be the Circle rate for the purposes of computing profits & gains.

 

 

How this will benefit?

Assume that a Buyer is buying a residential property from a Developer for a sum of Rs. 1 crore. The Circle rate value of the property is Rs. 1.2 crore. Prior to the relaxation, as the difference between the Circle rate value and Agreement value exceeded 10%, the Developer was required to consider Rs. 1.2 crore as his Sale consideration u/s. 43CA of the Act for the purpose of calculating his Profit & Gains from Business & Profession.

 

Similarly, since the difference between the Circle rate value and Agreement value exceeded 10%, the Buyer was required to show the difference between the Circle rate value and Sale consideration of Rs. 20 lacs (1.2 crore Less 1 crore) as deemed income under the head “Income from other sources” u/s. 56(2)(x) of the Act and pay tax on the same at the applicable rate.

 

The stimulus package announced provides relief by increasing the acceptable difference between the Circle rate and Agreement value from 10 % to 20 %, providing much-needed relief, both to the Buyer as well as to the Developer, during the current pandemic times.

 

The above tax sop is available only on purchase of new residential property from the Developer of value up to Rs. 2 crores and is not applicable on the resale of property. Also, the said benefit is not extended to the sale of commercial property. Nevertheless, the stimulus is expected to help Developers to clear unsold stock and generate liquidity for their other projects.

Image Credits: Nataliya Vaitkevich from Pexels

The stimulus package announced provides relief by increasing the acceptable difference between the Circle rate and Agreement value from 10 % to 20 %, providing much-needed relief, both to the Buyer as well as to the Developer, during the current pandemic times.

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“Atmanirbhar Bharat” Needs More Than Just New Laws

My previous blog – Realization of the True Vision of “Atmanirbhar Bharat” Requires Modernization of Laws – outlined my views on the need for India to modernize many of its laws in order to make faster and more tangible progress towards “Atmanirbhar Bharat”. I had also pointed out that sectors such as education need to be transformed so that future generation is equipped with skills that are relevant for the future. But as I pondered over our country’s transformation, it struck me that while making new laws and updating outdated ones to make them relevant to the current realities and emerging possibilities of the world is important, we need much more. After all, a lot of negatives such as bribery, workplace harassment, rape etc. exist in our society despite there being enough laws against them (although it can be argued that implementing them consistently or ensuring that justice is always delivered are another matter altogether).

In the context of nations transforming themselves, I remember reading about how Japan and Germany rebuilt themselves after being all but destroyed in the mid-1940s. In the early days, Japanese products were not known for the quality that they have been known for since the 1980s. But the Japanese people would buy locally-made products to support a nascent domestic industry. A couple of decades later, we saw the emergence of South Korea, Singapore, and Taiwan as other notable examples. Perhaps the most recent success story is that of China. As may be seen from the chart below, till the mid-1980s, India and China were at approximately similar levels of GDP. It is only in the last two decades that China has grown so much faster than we have, making its economy five times as large as ours.

                                                

                                      [1] Figure: Graphical representation of GDP of India and China

What is the common thread that runs through the transformation of all these countries? In my view, it is national pride and the resulting sense of collective purpose that created a virtuous cycle of sustained innovation and excellence. Japan and Germany found their mojos in the automotive, consumer electronics and heavy engineering and chemical sectors. Over time, South Korea took over the mantle of the world’s electronics hub, while China has become the “world’s factory”. Even a relatively small country like Taiwan has demonstrated its prowess in high-tech manufacturing.

The rise of India’s own IT services industry in this century is another good example of the fact that the right leadership can harness determination and pride to great effect. In this case, private enterprises took the lead in the mid-1990s. There were few regulatory restrictions to begin with and soon, with enablers such as SEZs, companies in this space thrived. TCS, Infosys and Wipro were the initial home-grown leaders, but thereafter, others, such as HCL and TechMahindra emerged. Today, foreign companies have a significant presence in India- a tribute to the strength of our talent.

But this blog is not about the success of Indian IT companies. The mantra behind the success of India’s software industry is pride. A sense of belonging (and aspirations) powered every individual associated with the industry to refine delivery models, introduce automation, etc. All this allowed companies to constantly reinvent themselves in line with what their customers expected and needed. A similar sense of pride needs to be instilled in all our citizens so that no matter what they do, they aspire to be the best.

I recall watching a video circulated on Whatsapp some years ago, that showed a young Indian boy who had picked up a smattering of several foreign languages. This helped him to converse with foreign tourists and he was able to sell his wares to more people. Imagine if tourist guides across India picked up multiple foreign languages and were able to explain the local sights and sounds better. Of course, it can be argued that technology allows tourists to buy a headphone and listen to a commentary in a language of his/her choice- but that would be a one-way communication and inherently limited to what the recording offered.

It is said that one can confidently set one’s watch to the time Japanese trains arrive/depart from their train stations. That is a mark of pride in being punctual and also people taking pride in their work. Sadly, these are not yet virtues that have been embraced by a majority of us. Mumbai’s famous “dabbawalas” are a stand-out example of a group of people taking pride in their work, and thus maintaining consistently superior levels of six sigma performance.

For years, India’s DRDO (Defence Research & Development Organization) has been accused of not delivering the kind of indigenous products that our defence forces needed. But in recent years, several products and systems have emerged from DRDO’s various labs that are likely to be inducted into the armed forces in the next couple of years. In fact, the past two months alone have seen at least half a dozen tests of tanks, missiles, radars and so on. Pride in one’s work will lead to better output and outcomes. These will raise the confidence that stakeholders have in the organization, and open the doors for more budgetary allocation to drive even more R&D.

The ISRO (Indian Space Research Organisation) is perhaps one of the best examples of this virtuous cycle. Over the decades, many of India’s space scientists and engineers chose to work for ISRO out of a sense of passion and pride, and not because they could not find jobs elsewhere. It is not as if ISRO has not had setbacks- but they have had many more successes than failures. As space becomes the next arena sought to be dominated by various countries, this sector will become even more strategic for India, given its implications for national security, communication and disaster management.

Now that space as a sector has been opened up to India’s private sector, there will inevitably be pressure on ISRO to maintain its trajectory of performance. But I believe that the sense of nation-building and pride in India that Dr. Sarabhai and his successors have instilled in ISRO will enable India’s space agency to retain its edge. ISRO may well team up with private-sector startups to take India’s space tech capabilities to a higher orbit- a win-win for ISRO, the private sector and India as a whole.

Cleanliness is another attribute of a city or country that evokes pride. Over the past five years, the residents of Indore have been taking pride in their city being declared the country’s cleanest- and this has rung in attitudinal and behavioural changes. I am not denying the role of the civic authorities in maintaining cities clean, but unless residents cooperate, no civic authority can succeed. I was born and raised in Calcutta (as the city was called before 2001). Even the most diehard Calcuttans will agree when I say that until a few years ago, Kolkata was not a very clean city (it has become much cleaner now). But right from when the city’s first metro service (also India’s first) began in the mid-1980s, metro stations and trains were remarkably clean and well-maintained. This was because the city’s residents took pride in their metro system.

This sense of pride must extend to all categories of Indian products and services- from public transport to private cabs; from real estate agents to sub-registrar offices; from small clinics to multi-specialty hospitals and so on. Only then can we as a country develop in an inclusive manner and not in a lop-sided way that constantly widens the gap between the rich and the poor or between urban and rural residents. As states compete to attract investment, infrastructure, tax breaks, labour laws and availability of talent locally are important determinants of how successful they will be. But imagine the attractiveness of states that have cities that are clean, or whose people take pride in punctuality, not striking work, etc. These factors will, in my view, play a vital role in delivering the true promise of “Atmanirbhar Bharat”.

As US-based Nigerian author, Idowu Koyenikan has said: “Your pride for your country should not come after your country becomes great; your country becomes great because of your pride in it.”

This sense of pride must extend to all categories of Indian products and services- from public transport to private cabs; from real estate agents to sub-registrar offices; from small clinics to multi-specialty hospitals and so on. Only then can we as a country develop in an inclusive manner and not in a lop-sided way that constantly widens the gap between the rich and the poor or between urban and rural residents. As states compete to attract investment, infrastructure, tax breaks, labour laws and availability of talent locally are important determinants of how successful they will be

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Realization of the True Vision of “Atmanirbhar Bharat” Requires Modernization of Laws

The government’s vision for an “Atmanirbhar Bharat” (self-reliant India) is laudable. This is not a new idea, though. Indeed, self-reliance was a key reason for a newly-independent India to lay emphasis on a public sector that, over time, was present in virtually every sector- from aviation to zinc. During the 1980s, the emergence and development of India’s private sector were powered by buzz phrases such as “Import-substitution” and “Be Indian, Buy Indian”.

Especially in the past three decades, as India has opened up its economy in a calibrated manner, its large domestic market attracted investments across sectors. While the market size is undoubtedly an important criterion, other aspects that make it easy to do business are just as critical. As a nation, India competes with other countries. In an increasingly globalized world, when investors (foreign or domestic) commit risk capital to India, they are making a conscious choice. Other countries (e.g. Vietnam, Malaysia, Bangladesh etc.) may not have large domestic markets themselves but are attractive as hubs for manufacturing products that are then exported around the world, giving a boost to the local economy.

Through sector-specific “liberalization” and “reforms”, Indian governments have, since 1991, been taking steps to attract investments into the country. Modifying the legal framework governing such investments and operations is a key enabling action. The results are visible, as India has become self-reliant in many areas. Today, we export many products and services to countries around the world- including the world’s most developed nations. But there are still many gaps that need to be plugged. Electronics are embedded in almost every industry, but we as a nation are a long way off from being self-reliant in this strategic field. Vital ingredients for the pharmaceuticals sector too are imported, as are telecom and defense equipment that is vital to our nation’s security.

For decades, governments and entrepreneurs have mistrusted each other. High levels of mistrust have also existed between private sector management and the labour force. In the context of India’s cooperative federal structure, as regional political parties have emerged and been elected to power, the chasm of mistrust between state and central governments has generally widened. That is why sectors such as agriculture and education, which are both fundamental building blocks of any economy, continue to be shackled by many regulatory restrictions. India’s labour law regime too continues to be viewed as lacking the level of flexibility that exists in many other countries.

That India has the potential to grow rapidly is well-known. But to realize this potential, we need to quickly bridge the widespread trust deficit and ensure that all stakeholders are aligned towards the overall purpose of India’s overall development. Given India’s large population, levels of illiteracy, weak healthcare infrastructure, wide income disparity, and lack of a social security net, there is no silver bullet. That is why, what is needed is a holistic approach that enables balanced, all-round development of every component of India’s economy- agriculture, manufacturing and services.

To use an analogy from cricket, AB de Villiers is known as a destructive batsman (especially in the T20 format) because of his ability to play shots all around the field. Governments– both at the center and states- must develop a similar kind of “3600 perspective” to enable the development of all sectors and all segments of the population (children, women, LGBTQ, those affected by mental health disorders, rural and urban residents, entrepreneurs, workers, etc.). I believe that it is through this kind of lens that we must view the actual and proposed changes to laws in the past year or so, as their overall intention is to unshackle different segments/sectors of India so as to accelerate development.

This kind of mindset will inevitably create competition amongst states to attract investment– and thus infrastructure, jobs, and overall development. Such competition will force politicians, private enterprise owners, citizens and all other stakeholders to work towards a common purpose. We have started seeing this play out in bits and pieces in some parts of the country, but much more needs to be done by state governments, given that the onus for formulation and implementation of many policies that are critical to creating a welcoming investment climate lies with them.

Here are 10 examples that clearly signal the government’s intent to make it easier for companies to do business in India and thus contribute to an “Atmanirbhar Bharat”:

  • Introduction of the Production Linked Incentive (PLI) scheme to attract manufacturers of mobile phones, electronic components and microelectromechanical systems to make in India.
  • Changes to the Companies Act (e.g. decriminalization of offences other than fraud or where the larger public interest is involved; removing imprisonment as punishment for minor offences, etc.)
  • Changes to labour codes relating to Industrial Relations, Social Security, and Occupational Safety, Health and Working Conditions. It is expected that these changes will give companies with less than 300 workers greater flexibility in retrenchment without obtaining prior government approval. The changes also restrict workers’ rights to strike work without giving 60 days’ notice.
  • Changes to the Insolvency and Bankruptcy Code.
  • Allowing farmers to sell agricultural produce outside the Agricultural Produce Market Committee (APMC) mandis, thereby reducing the role of middlemen and giving farmers the option to sell their produce at more remunerative prices.
  • Allowing companies to raise equity capital outside India by listing their shares in specified foreign jurisdictions (without requiring listing in India as well).
  • Allowing private sector participation in the space sector, including launching satellites, setting up control centers outside India, develop new systems and offer “Spacecom” services around remote sensing, navigation, space exploration etc.
  • Simplifying the Environment Impact Assessment (EIA) process for certain projects.
  • Changes to the Food Safety and Standards Authority of India (FSSAI) regulations to make people more aware of the health risks of packaged foods and banning of e-cigarettes to ensure that our citizens can make better-informed choices around their health.
  • Reducing ownership of firearms by decreasing the number of firearms allowed and the validity of the licence.

Many of our country’s laws were originally formulated several decades ago when every aspect of society was very different. The intervening period has seen myriad changes driven by technology, greater awareness of the environment and the imperatives to protect it, progress in the field of medicine and health care, etc. Perhaps the most significant change has been ushered in by the COVID-19 pandemic, which has fundamentally changed the way millions of people live and work.

As our environment evolves, it is only natural that laws too will need to evolve in tandem to ensure that they remain relevant and effective. As our policy-makers formulate new policies and enact new laws, they would do well to be guided by the line “Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit” from Gurudev Rabindranath Tagore’s famous poem “Where the mind is without fear”. While modifying laws and framing new ones, the objective should be to enable and not just control. Here are some additional areas that the government must urgently turn its attention to:

  1. Enact specific data protection laws that are appropriate to India in light of the growing wave of digitalization around us. Making tweaks is not enough; a comprehensive legal framework is needed.
  2. Eliminate the need for multiple regulatory filings by allowing companies to upload data to one location from where regulators can access what they need. This can go a long way in easing the compliance burden. A study by Teamlease has found that Indian businesses operate under the burden of more than 65,000 compliances, including 2,500 regulatory updates and 3000 filings in a year![1]
  3. Come out with a Direct Tax Code that reduces the need for frequent and large-scale changes and thus provides a higher degree of stability and predictability to companies and individuals.
  4. Rationalize the GST regime by reducing the number of rates and further simplifying the compliance process.
  5. The New Education Policy to encourage “critical thinking” in students and enable the creation of world-class institutions of higher education in India is an excellent step. In order to accelerate this transformation, I believe the government must enable reputed foreign universities to set up campuses in India. Perhaps this can start with online access to classes- a phenomenon the pandemic has already forced on educational institutions. In addition to creating domestic R&D capabilities in areas such as robotics, AI, healthcare, etc., such a move can also help India conserve valuable foreign exchange in the form of the money spent by Indian students studying abroad- resources that can be deployed elsewhere.

Of course, building political consensus around such policies will not be easy. But the emerging context has, in my view, created a conducive environment to push forward with bold structural reforms that will help transform India holistically, and not just facilitate lop-sided development.

As our environment evolves, it is only natural that laws too will need to evolve in tandem to ensure that they remain relevant and effective. As our policy-makers formulate new policies and enact new laws, they would do well to be guided by the line “Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit” from Gurudev Rabindranath Tagore’s famous poem “Where the mind is without fear”.

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