Manufacturing sector: Key expectations from Union Budget 2016

As we are steadily climbing notches in the ladder of ease of doing business, a much-needed push to the manufacturing sector is important to sustain and promote an all-inclusive growth.

By Rajesh Srinivasan  
Friday, February 26, 2016

Amidst the uncertain economic prospects across the globe, the Finance Minister's Budget is expected to provide an indicative platform of the government's economic policies and impetus to its strategic campaigns such as Make in India, Start-up India and Digital India, which seem to lumber along.

As we are steadily climbing notches in the ladder of ease of doing business, a much-needed push to the manufacturing sector is important to sustain and promote an all-inclusive growth. While the efforts of the Government in this direction are laudable, certain issues do remain which are holding back the growth of the manufacturing sector. In this article, we have attempted to identify the key areas where reforms are required in order to provide stimulus to the manufacturing sector.

Demand Push:As per Nielsen's report, the Indian manufacturing sector has the potential to reach $1 trillion by 2025 and can contribute approximately 20 to 30 per cent to India's GDP from the current contribution of 15-16 per cent. This apart, the service sector too needs a strong manufacturing base as it cannot operate in vacuum and therefore it is axiomatic that the manufacturing sector would be a big determinant of India's growth.

Manufacturing sector has been plagued by various issues - the major ones being weak consumer demand, decline in exports, negative growth in capital goods sector and infrastructure spending. In order that the economy is put on a growth trajectory, it is necessary that there is a demand push in the form of increased infrastructure spending, which in turn would result in generation of demand to a great extent.

Facilitate skill development and encourage innovation:On the skill side, we are faced with an issue of scarcity in plenty as the proportion of skilled persons in our large volume of manpower is very small and we may miss the advantages of the much touted demographic dividend. While Skill India is a right step in this direction, the government may also encourage private initiatives on skill development programmes. Similarly, innovation would be a key factor in transitioning India into a global manufacturing player. Core research is a much neglected sector and this should be appropriately encouraged and incentivized so that there are innovations from this country.

Protecting domestic manufacturers:Indian Industry has been at the receiving end of imports from China and is reeling under its impact. While the government has been proactive in protecting Indian industry with the possibility of treating China as a non-market economy (NME) in anti-dumping proceedings, greater protection could be afforded to Indian Industry.

Business friendly tax reforms:In the last year's Budget, our Finance Minister made an announcement to reduce the corporate tax rate from 30 per cent to 25 per cent over the next four years to improve India's global competitiveness. To balance the rate reduction, the government has recently laid down a road map to phase out several tax exemptions and deductions from April 1, 2017. It is expected that the government will set out clear implementation guidelines since big projects need to be reviewed independently.

Development of new Special Economic Zones has been sluggish over the past few years owing to several factors both global and domestic. Reinstating the SEZ exemption through removal of minimum alternate tax and dividend distribution tax will immensely boost both developers and the units. Further, the SEZ benefits should not be phased out as it would hamper fresh investments.

To promote 'Make in India', it is critical to take measures from ease of doing business perspective. There needs to be a change in the mindset of the tax department to facilitate business instead of playing a restrictive role. Timely implementation of Dr. Shome and Eashwar Committees' recommendations on tax policy and administration reforms will certainly bring in efficiency in our tax regime.

On the indirect tax front, one of the major challenges faced by the manufacturing sector presently is accumulation of CENVAT credit due to inverted duty structure. Accumulation of CENVAT credit continues to affect the industry, making them uncompetitive as well as affecting financial viability. The government could consider lowering the duty on various inputs to rectify this issue.

Even though lots of incentives are provided to attract exporters, there is considerable delay and tedious process in grant of refund. The industry expects the government to announce strict timeline for granting the refunds.

Implementation of GST would be a game-changer too. Passing of the bill in the current budget session is crucial to resolve a plethora of indirect tax issues as well as enable free flow of goods in the economy.

All the direct and indirect tax budget proposals must be based on whether it would encourage manufacturing in India as against imports. It is necessary that a stable regulatory environment be provided and there is a time bound resolution of disputes as nothing affects the sentiment of Industry than the Damocles sword of taxman. Everyone hopes that the budget proposals will certainly accelerate the growth pedal for the economy as a whole and in particular the manufacturing sector.

(Co-authored with V P Manikandan, Director; and Hema D, Deputy Manager; Deloitte Haskins & Sells LLP)

 

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