Budget 2021: Buoyant for FDI, underwhelming for trade

By Jayant Krishna, 

In an economy recovering from the pandemic-driven recession as well as contraction in absolute terms, these are surely the worst of times as well as the best of times given the never-before opportunity to reform and make the investors experience a regulatory certainty. With no significant changes in taxes, it is a business-as-usual Budget reflecting some kind of a stability in the policy regime.

For those who wish to see a greater integration of India with the global economy, finance minister Nirmala Sitharaman’s Budget surely holds promise by way of soliciting higher foreign direct investments (FDI) in insurance, infrastructure, manufacturing and healthcare sectors. However, it overlooked opportunities to boost international trade by rationalising customs duty and further incentivising exports.

FDI in India grew by 13% to a record of $ 50 billion in 2019-20. UNCTAD’s World Investment Report 2020 puts India as the 9th largest recipient of FDI last year. The year 2021-22 hold much promise as the economy is projected to register a double digit growth.

A higher allocation of Rs 1.97 lakh crore in next 5 years for the PLI scheme augurs well to incentivise manufacturing. In consonance with the Atmanirbhar Bharat vision, one can hope for more overseas firms to leverage their R&D and technology for manufacturing in India. Such measures would surely propel India closer to its ambition of becoming the next manufacturing workshop of the world.

However, the rationalisation of customs duty did not happen as the review of around 400 exemption categories still remains work in progress. The trade-to-GDP ratio indicates the relative importance of international trade in the economy of a country. In a way, it shows the openness of a country to international trade, and some call it the trade openness ratio. Our trade-to-GDP ratio declined by 3.4% to 40% in 2019. This ratio had reached 56% ten year ago in 2011. India must work at expanding its global trade that would also be good for job creation.

There are many positive announcements in the Budget. The focus on fintech sector is indeed encouraging as the government will facilitate a world-class fintech hub at Gift city. FPI getting the deduction of tax on dividend at the lower treaty rate has been welcomed. As expected, the tax holiday for start-ups has been increased by one more year till March 2022. Doubling of allocation for SMEs is appropriate. The NRIs have welcomed the permission to operate One Person Companies (OPCs) in India.

Firms in many developed economies are contemplating to relocating their manufacturing supply chains to destinations besides China and India is amongst the front-runners to attract such investments. In terms of making India a preferred investment destination, this Budget can easily be called progressive that would send encouraging signals to overseas investors and would hopefully propel India a few steps closer to boost manufacturing and reinforce its strengths in the service sector.

The author is Group Chief Executive Officer, UK India Business Council