BY NOW, the tenacity of the domestic market has proved to be the greatest force behind the resilience of Indian economy, putting to rest all doubts about economic recovery post Covid. Right in the midst of a world dreading the next recession, India will continue to expand its GDP. In fact, large consumption sectors such as automobiles, real estate and consumer lending are peaking to their all-time highs this fiscal. Even the large FII pull-out worth over $18 billion has failed to dim the enthusiasm in the stock market as domestic mutual funds more than made up for the shortfall. So how can finance minister Nirmala Sitharaman's fifth Budget in February 2023 accelerate the growth of the economy?

Fortune India invited a pre-budget discussion with some of the brightest economic minds to present new ideas for Budget 2023. The panel comprised Gopal Krishna Agarwal, national spokesperson for economic affairs, BJP; Prof. Gourav Vallabh, spokesperson, Indian National Congress; Nadir B. Godrej, chairman, Godrej Agrovet Ltd. & Godrej Industries Ltd; Rahul Garg, partner, Price Waterhouse & Co LLP; Sonal Varma, managing director & chief economist, India and Asia ex-Japan, Nomura and Subhash Chandra Garg, former finance and economic affairs secretary, Government of India & chief policy advisor, Subhanjali, a thinktank. The discussion was moderated by Rajeev Dubey, Editor-in-Chief, Fortune India. Edited excerpts:

What are the biggest challenges facing the Indian economy this fiscal?

Subhash Chandra Garg: There are three principal objectives for Budget makers — managing public goods and services, doing a good redistribution in the economy, and growth orientation. In the current Union Budget, expenditure was about ₹40 lakh crore, of which ₹14-15 lakh crore goes into funding interest, pensions, and mandatory transfers over which the government doesn't have much control. You have ₹25 lakh crore where the government has discretion. Many subsidies, specifically on food and fertiliser, have gone up by at least ₹2-2.5 lakh crore over budget estimates. The challenge is to find money for it.

The government has two revenue sources — tax revenues and debt funding. There has been good turnout in corporate taxes and direct taxes, GST. But by the time we reached half the year there was a tapering and in the next six months, growth in tax revenues might start declining. On the year as a whole, we might still get about ₹2-2.5 lakh crore more, which might be insufficient to take care of additional expenditure. The challenge is to find money for existing expanded expenditures and the government has huge interest in expanding growth-related expenditure. Tax revenues are tapering and next year we are not going to see more intense tax revenue as in the first half of this year. Then, how do you manage the difference?

We already have elevated deficits. You have to bring it down. The three challenges are managing expanding expenditure, slowing revenues and elevated debts.

Sonal Varma: The number one challenge will be growth. We are coming on the back of FY23 where real growth was 6.8%, but normal growth was substantially higher because of inflation. That helped boost tax revenues and aided consolidation despite rising expenditure. That support will not be there in FY24. Nomura expects a recession across the U.S. and Europe, which means world growth next year will be substantially weaker. While India is domestic demand driven, its impact on exports, manufacturing and investments will be felt.

In FY24 we are looking at a real GDP growth of 5-5.5%, so the current estimate of 6-6.5% is optimistic. The biggest challenge is going to be the slowdown in the next 12 months. Second, post pandemic our fiscal deficit has doubled, debt to GDP has gone up from 75% to 85-90%. The challenge of not having enough revenue buoyancy next year will mean stepping up more on public capex, because many private investments may end up getting pushed out. How do you support growth while keeping fiscal consolidation in check is going to be the second challenge. Third, being a pre-election year, there may be a temptation to be populist; we don’t have the fiscal space and have to prioritise spending. We cannot allow inflation to go up. So, fiscal policy needs to be complementary to monetary policy in terms of containing inflation.

Rahul Garg: In solving this growth problem, if we go to the 'what can help' (question) as money matters and how does one get that money. Historically, our tax to GDP ratio has been relatively very low. With comparable economies being at 24-25%, we are at about 11%. How does one grow tax to GDP ratio which gives revenue to support inclusive growth programmes, subsidy programmes, some extent of distribution and also support growth from public expenditure? To achieve both — inclusive growth as well as public expenditure — it is important our tax to GDP ratio grows to a decent number and there are efforts to ensure we get decent corporate tax, indirect tax, state tax and GDP ratio which is commensurate with economic realities.

Nadir Godrej: The big challenge before the economy is global inflation, slowdown in China, after-effects of the pandemic, and the Ukraine-Russia war. Inflation in India will be controlled. There is no significant wage-push inflation. Our inflation basket is largely commodities, and prices are falling. There are few indigenous prices like vegetables, and vegetable prices are also very benign.

There are challenges to growth because of the global slowdown. We have to prioritise growth and a larger budget deficit is tolerable provided expenditure promotes growth. Infrastructure spending has promoted growth, which brought in private investment. Infrastructure spending helps exports. The Gati Shakti programme and domestic growth will help. We should not worry much about the budget deficit, but about the nature of the deficit. Any expenditure that promotes growth is welcome. We need to reduce subsidies and provide direct transfers which help the poor. I suspect there may be a temptation to see that the budget is populist. Hopefully that will be resisted.

Prof. Gourav Vallabh: There is consistent high unemployment. For the last 2-3 years, we said jobs were not picking up because of Corona. Now when the world is out of the pandemic, our unemployment rate is over 8%. Urban unemployment rate is consistently over 9%, more than rural unemployment.

The focus should be on jobs. All rating agencies or financial bodies have predicted GDP growth of 6% plus. The same agencies predict average inflation across the year as 7% plus. With high unemployment, low growth and high inflation, how can a middle class family survive? Domestic reasons contributed to high inflation. The government can respond to consistent high inflation. The third is that we need to find new sources of revenue.

High unemployment impacts 95% of the people. There is a need to find new sources of revenue so that public expenditure for people affected by inflation and unemployment can be spent on them to improve their quality of life. Indirectly, 75% of tax revenues are going towards interest and mandatory expenses.

Gopal Krishna Agarwal: The biggest challenge is to create jobs. Unless employment generation happens, particularly in manufacturing, inclusive growth is not possible. Defence, MSME, rural, cottage industries, and value addition through cooperatives of farmer producer organisations can generate employment. For private sector investment to grow, we need demand creation on which the government is working.

Defence procurement from domestic producers, reserving tender up to ₹200 crore for local manufacturers and working on Free Trade Agreements with countries where our manufacturing can integrate with the global supply chain. The second challenge is to build public opinion in favour of mega reforms. In the 75th year of Independence, we are talking of being an economic superpower by 2047. That cannot happen without growth, for which big reforms are needed. We have to create a national narrative. We cannot go for reforms only in a crisis like 1991. We need consensus among well-meaning people on reforms and limitations of the government with the requirements of reforms. The third is investment. A good investment climate requires reforms.

How should India create growth in a sea of global slowdown and recession?

Subhash Garg: The government is not a good businessman. We have an investment of about ₹40–45 lakh crore in the public sector and revenue from there in the form of non-tax revenue like dividend or transferable surplus, the returns are not even 0.5%. The bulk of the investment goes into railways, roads and metro, which are all enormously loss-making.

The private sector largely produces for the government and not for consumers. People ask why we do not have world-class companies. You will find the private sector has not got a chance to innovate and create technologies. Even in IT, semiconductors or digitisation, the new schemes that we have started — PLIs — are rated as forward looking and successful. But these are not going to create world-class enterprises. In semi- conductors, almost 95% of what goes into the semiconductor unit would be imported. We assume manufacturing is the way to create jobs. High-tech manufacturing today does not create jobs. The biggest employer today is IT services, and 20% of chip designers and data analysts globally are from India. We do not focus on that.

Sonal Varma: Global recession is more of a next 12-month challenge. Beyond that there will be recovery — whether it is V, U or L. Over the next 12 months while global demand is weak, frontloading some projects would make sense because what is under-appreciated is the impact of this global environment on the private investment cycle. We need to front-load most projects in the next 12 months in light of the likely demand vacuum from exports and private investments. From a medium-term perspective, global threat is an opportunity for India because of the challenges the U.S. is facing right now on inflation, tight monetary policy, and energy crisis in Europe. In our estimate, even in 2024, these countries will have a 0% growth rate. In India where the bigger challenges right now are more in terms of global spillovers, the ability to bounce back faster after the hit will be a lot more in 2024. While globally there is focus on China's growth, the medium-term diversification from China in terms of trade supply chains and investment diversification is an opportunity for other countries. From India's perspective, the momentum that we have and the push through PLI need to continue. Once the global storm settles, the investor comes back to India.

Instead of focusing only on manufacturing, India needs a broad-based all-rounded approach to growth. Ultimately growth comes because of hard infrastructure but beyond that, it is time to focus on softer aspects in terms of process reforms compliance, law and order, contract enforcement and creating that enabling environment and competing on innovation. India has that opportunity. It is about the 2–3 things we need to do to grab that opportunity. There are challenges but we can do reasonably well.

Gopal Agarwal: At a macro level, there are two, three areas where we are working, which can propel growth. One is the cooperative sector. It has huge potential and a large presence, but no major reforms have taken place. India's inclusive growth can come from the cooperative sector and value addition linking it with the agri economy.

Second, industries are facing huge land costs, which is a state subject. What should be done about land cost is the second area and issues of taxation, value addition, wealth tax.

Without wealth creation, how will you go for a distribution model? From 1947 to 1991, we experimented with failed socialism, which brought us to the verge of a sovereign default. We have checks and balances. We should use them and not make more draconian laws. One area where we need consensus is disinvestment of loss-making PSUs. Because of the democratic set-up, we carry forward the loss-making PSUs. You cannot sell only loss-making PSUs, who will buy? Even the private sector gets out of certain businesses.

There is a lot of disparity in the country due to historical reasons. Subsidy is the only mechanism to deal with such issues. The issue of targeted and direct benefit transfer is a governance issue, not an economic one. Leakages and corruption are not economic issues, but of governance. The government should decide which sector needs subsidy. As a concept, subsidy is required at the current status.

Where are the opportunities for new tax revenues?

Subhash Garg: On tax to GDP, there are not many opportunities for growing tax revenue. In direct tax, we had a big bump in the last two years thanks to inflation and rising commodity prices. We need to raise the tax to GDP ratio but by only increasing the rate or otherwise you cannot do that. We had a good run in GST because of inflation in wholesale segments. In GST, the largest revenue comes from IGST. With global inflation coming down, growth in that segment will also not be there.

There are four bases through which taxes are levied and collected. One is on income which may be on individual wages or profits earned by corporates. Tax on value-adds is the second tax base and indirect tax like GST is an example. Tax on wealth is the third as in recent times wealth has expanded. Apart from real estate which was a traditional form of wealth, new avenues of wealth generation like stocks, bonds, ReInvits have gained popularity. The fourth is tax on carbon emission, which is partially developed and hugely untapped.

Wealth and emission tax need to be developed for taxation purposes. In the current regime, different assets attract different rates for capital gains. Some asset transfers also get exemption. So, there is scope for reform on capital gains on two aspects — transfer-related taxation, and valuation. When companies issue dividends it gets taxed in the hands of recipients but a company that does not wish to issue a dividend gets rewarded by investors as its market value moves up. This creates a distortion that needs to be corrected. So, can we develop a system where market valuation and duration of transfer get explored from a taxation point of view?

In India, where not more than 50 lakh people pay income tax, direct tax on wages is sufficiently explored, but taxation on wealth needs to be explored. Careful drafting on emission tax will serve the dual purpose of enhancing tax to GDP ratio and faster adoption of ESG mandates.

Sonal Varma: The countries where tax to GDP ratio is high relative to India are those where tax rates are low, compliance is easy. That's the framework in which we need to design everything. Whether it's income tax, corporate tax or GST, we can fine tune but not raise tax rates in the next 12 months, which will be challenging. Tax rates in India are high and we need to move towards better compliance and lower rates. That will widen the base.

Gourav Vallabh: We require high tax collection from people whose marketcap is beyond a certain threshold. We know many start-ups which are in losses and market-cap is ₹1 lakh crore or more. They are consistently showing losses, but market-cap is increasing. They are using our infrastructure, policies, and manpower. So, how we get revenues from these entities is something that this Budget should address. For companies with a market-cap beyond a particular threshold, there should be some tax on the topline, say 1%. We have to raise new taxes by having a presumptive basis, topline-based.

Rahul Garg: When market valuation of companies goes down, they still make losses or don't make significant revenues. In that case, the proposition of tax is preposterous for the company.

The value that gets created in the hands of the shareholder, that value gets taxed whenever the shareholder makes profit out of that value, whether it is tax as a short-term capital gain at ordinary rate or long-term capital gain at a different rate. But to recognise that value created in the hands of the shareholder should be a reason for the company to pay tax, is not a great idea in terms of tax collection. The company's tax should always remain on the company's profit.

Services sector should find place in an optional presumptive tax regime to widen the tax base.

Gopal Agarwal: Now is the time to simplify taxation, make it competitive at global levels. If corporate tax in Singapore is 15%, and you want to compete globally, this is not the right approach.

One major concern is that there is harassment due to complexities. Second, from the Gujarat election, I am very happy that good and effective governance, pro-business policies are being recognised in the country. Consider business and industry as part of nation building.

Services and technology sectors — unicorns or fintech — have created wealth. Those sectors are important. Global rules of economics are not defined by us. We are working on Basel 3 norms, and international financial reporting standards (IFRS). We are moving towards IFRS, where unrealised valuation is also being incorporated into your balance sheet. We have to integrate our economy and follow global rules of the game.

A case has been made for rich tax, wealth tax. How do you impose tax on notional wealth? Is there a case for that and is it a practical solution?

Gourav Vallabh: I believe we require something from people who are generating wealth, becoming the second-richest person on Earth and not giving any substantial contribution to taxes. We have to get money from them and put it in the hands of the people below the poverty line. A middle class person in a company with ₹20 lakh per annum, pays an average tax of 22-23%, but the company generates ₹100 crore profit and pays only 17%.

Valuation should be based in the hands of the person who is holding that wealth. If a company is consistently showing no profits and in the next few years, they are expected to show no profits, then taxation should be on the person who is holding that value. Second, because of complexity, we cannot leave people who are using our country's natural resources, infrastructure. We are proud they are creating wealth. But they should give some component of their wealth for upliftment of 95% of the people.

After migration, 50% of our population is now in urban centres. How will they consume when they do not have money? The government needs to come out with an urban NREGA. At a time when people are not having money, because of massive unemployment, and inflation is over 7%, there should be some way to transfer wealth to people who want to consume it.

Rahul Garg: The basis for tax should always be economic profits. Any tax that arises due to notional, nominal or artificial value to be recognised, should be shunned. We should have tax payers completely in sync with what economic profits are and tax should be a percentage expressed as their economic profits.

At the end of the day, when you have valuation as a base, it does not mean it does not come to tax. It does come to tax because anything that you churn becomes economic profit. We need to prefer taxation based on economic profit rather than notional profit.

Capital gains tax should be made simpler but if valuation becomes the base it will create severe problems in compliance and tax administration. Profit or value addition as a base for tax is an accepted norm as there is a measurement criterion. If you were to have tax based on value then we need to understand that beauty lies in the eyes of the beholder and we have seen that values keep going up and down.

Subhash Garg: The issues are taxation of wealth, in the world the capital has expanded. Our global GDP is about $100 trillion, but global wealth is about $600 trillion. Most of our tax globally, including India, is wage-based taxation. The time has come to look at wealth taxation. It's the people who are wealthier not the companies.

How do we add jobs?

Subhash Garg: Employment happens when in business, you create value. Labour contributes in value creation and that is the job. Any payment without value creation is not a job. If we encourage wherever businesses can create value, it will create jobs. Public sector is not adding many jobs. Likewise in manufacturing we have a lot of automation and there is much less job creation. The sectors which give more in wages to labour are where jobs can come — primarily in services and the small sector. We need to create an ecosystem where they can create value, turnover and output. The government should focus on encouraging investment and setting up businesses where more labour is to be employed.

Rahul Garg: On jobs, we should have self-employment and being able to convert entrepreneurship into throughput. We need focus on converting micro-entrepreneurs' commitment to livelihood, it will add to growth and employment.

Sonal Varma: MGNREGA or any other versions of that are fall-back options, social security schemes creating jobs. We need to take an all-round approach to creating growth, so it cannot be just manufacturing, but within agriculture, processing industries, and services.

Gourav Vallabh: Manufacturing job creation can only be in the micro sector. They require technology help and you need to introduce them to the market. As far as capital and product is concerned, they know what to do, how much capital is required and are ready to put it up. Government intervention will create jobs not in lakhs but in crores.

Second, we need a high-end services sector. In the 80s and 90s, we entered the high-end software industry. We came to BPOs and call centres in 2005 and 2010. Earlier we gave the world software, and codes. We need a software industry focused on AI, ML, 3D and analytics, because these will be four big job creators.

On disinvestment, no matter what happens, only one person will benefit. I don't think any prudent government will take this type of disinvestment. That is why we always said do not monopolise two or three business houses. We want eight crore micro enterprises, two crore SMEs. We don't want 7-8% growth where 40 crore youngsters are looking for a job and people are dying of hunger. Make policies for everyone.

Gopal Agarwal: Entrepreneurship and self-employment is the way out for job creation. There cannot be limited areas where job creation takes place. On resources, the government is the best judge on which areas have a higher multiplier effect on investment.

As far as economic growth is concerned, exports will be a big challenge. Is there a way we can trigger consumption?

Sonal Varma: If you look at past cycles when India was hit by recessions in advanced economies, the biggest hit comes on exports followed by private investments and consumption moderates. The biggest tax on consumption has been higher inflation.

The impact on real income because of inflation has been substantial. With a lag we will see lower inflation in CPI numbers, which will actually be positive in terms of real income increase from a consumption standpoint. There will be moderation because a lot of catch-up, pent-up demand is over. The impact of domestic monetary policy tightening done this year will largely be felt on discretionary consumption.

There is an auto correction mechanism that will support a part of consumption. Consumption is a function of income certainty. If you are targeting rural consumption, say construction and therefore frontloading public infrastructure in the next 12 months, we will see private demand indirectly feed through consumption.

We do not need any transfer scheme or income tax cut scheme to boost consumption because propensity to save during uncertainty is high. So you will not get the bang for the buck that you are looking for on growth. Moreover, if you are going to give free cash to someone then it will reflect in inflation and other macro parameters. We need to front-load public expenditure by creating jobs and income certainty. Generating consumption will bring down inflation, which again is good for consumption.

Subhash Garg: Post-Covid there is a bump in Indian exports due to stimulus provided by the U.S. and European nations. Indian imports rose much faster than exports. Due to the Ukraine war and other global issues, India's export growth will be muted next year, maybe between 2-3%. This fiscal India will clock export numbers near last year's figure, while the trade deficit will be higher on rising imports. Our subsidies are growing faster than taxes so we may see a negative contribution to GDP from the net tax front.

On the ongoing debate on subsidies — revdi vs gajak, how do we separate merit and non-merit subsidies?

Subhash Garg: On subsidies, people need minimum infrastructure services like power, access to roads, housing. If people are not able to support those facilities on their own, and the government comes to their aid, it makes sense. Schemes like Swachh Bharat, Housing for All or electricity subsidy to the poorest, MNREGA, meet needs of people who are not in a position to support themselves. These are merit subsidies.

The Central government is the biggest freebies spender. In 2021-22, subsidy expenditure was ₹12.5 lakh crore, out of the total expenditure of ₹25 lakh crore. Over 50% of the government's effective expenditure, excluding interest and other expenditure, went into that. States have a fiscal constraint, that you cannot borrow more than 3.5%. The challenge on freebies will have to be met more from the Central government than states.

Sonal Varma: The handholding, whether it is via subsidies on PLI, cannot be permanent. While supporting those who need support now, the focus needs to be on how to make them self-driven. On subsidies, we need more targeted transfers, plugging leaks. But these are transitional measures. We do not want to be in a situation 10 years later, with the same subsidies.

Rahul Garg: On subsidies, lots of large economic programmes require the kind of support the government gives them. Whether you classify them as subsidy or dole-out, we must have a calibrated approach to have businesses succeed in the global marketplace.

Gourav Vallabh: I was not interested to move into this debate, that revdi (freebies) is bad and gajak (loan waivers to corporates) is good. Of the ₹10 lakh crore writeoff, only 10% had been collected from borrowers. This is okay, but giving ₹75,000 crore to MGNREGA is bad, giving 5 kg grains to people suffering during Covid is bad. We have to come out of this mindset as we still have people below the poverty line.

The Centre cannot manage its fiscal deficit but is asking states to manage finances better. As the head of the family, the Centre has to set an example on how finances are managed, states will follow.

Gopal Agarwal: The revdi (freebies) culture is a big worry. Welfare measures are a very good thing, but provide for them in state budgets. Don't make future generations pay for what you are distributing now. Welfare is a constitutional responsibility of the state and Centre. We are not saying that welfare should not be there, or subsidies should go, but should desist from crony socialism.

How sustainable is corporate tax at 16% and individuals at 35%?

Rahul Garg: Businesses are taxed relatively less than individuals because they contribute much more to the economy by the ripple effect of what they do or produce. In most countries, corporate taxes are lower than the top rate of the individual taxes.

SMEs were among the worst impacted during Covid. How can they be brought back on track?

Gourav Vallabh: The time has come to separate M from MSME. We need to spend on the micro sector. Just like the middle class emerged out of the services sector, sustainable employment at the ground level, at the village level, at the taluka level, will come from micro. The government should think of making a separate micro industry ministry. How can a ₹50 lakh unit survive in the current ecosystem of ₹200-300 crore SMEs.

Gopal Agarwal: We have a lot of potential for social entrepreneurship. We have an open social stock exchange. We should not say profit is a bad word in the sector because everybody puts in labour and that is important for social entrepreneurship. If you look into the capital market, there is a strong perception in favour of India as a growth story. That is because there's a perception in the government that we are going to do it.

Rahul Garg: If you look at our demography, 300 towns are at that level where our top 100 towns in per capita income were 20 years ago. If you focus on those 300 towns, you have a good base, to begin a journey with micros, and contribute to the economy, given the entrepreneurial skill. Yes, we need special focus, whether it is a ministry department focus initiative on micro industries, particularly in those cities.

How do you see Indian firms meeting the ESG challenge?

Gopal Agarwal: In manufacturing, ESG compliance and standards will be a big challenge. At the time when WTO went for agriculture and other services reforms, they used phytosanitary standards for creating bottlenecks in global trade. Our private industry and public sector are not prepared for ESG standard compliance. That can be a bottleneck.

Rahul Garg: Whether the ESG standards are pushing us to create barriers for global trade is a different issue. We in the NCR know what pollution does to our health. We should deal with it at a political level so that it does not dampen exports and growth. But we should also see this as an opportunity to change behaviour. For that, introducing taxes and incentives for ESG would be useful.

We must look at green taxes — as a source of revenue, which does good to the planet, and make sure we are not overburdening tax payers for reporting, but nudging them to share how they pay taxes in a voluntary reporting framework.

Subhash Garg: Careful drafting on emission tax will serve the dual purpose of enhancing tax to GDP ratio and faster adoption of ESG mandates. India is attracting FDI largely into services. The two big opportunities in manufacturing are digital and ESG-related works like waste management.

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