Atmanirbharta: Key sectors likely to get push in Budget

Atmanirbhar Bharat | Key sectors likely to get push in Union Budget 2021

We look at four key sectors wherein the finance ministry may focus to realise its 'atmanirbhar' vision

The Budget can likely stengthen the Centre's Atmanirbhar Bharat pledge. Credit: PTI

Finance Minister Nirmala Sitharaman will present the Centre's budget for FY22 on February 1, with many hoping for a budget that charts a path to the recovery of the Indian economy, which has hit a slump due to the Covid-19 pandemic.

Among other things, it is most likely that one of the Budget's key spending areas will be to stengthen the Centre's Atmanirbhar Bharat pledge.

As India fought the coronavirus and tensions with China after the Galwan Valley clash escalated, PM Narendra Modi's government began emphasising on 'atmanirbharta' or self-dependency to push for Indian goods to take precedence over imported ones. Each time modi takes centerstage, he has pushed for greater focus on locally-produced products and has asked people to be "vocal for local" to realise his government's push for a self-reliant India.

Read: Reading FM Nirmala Sitharaman's mind before Union Budget 2021

We look at four key sectors wherein the finance ministry may focus to realise its 'atmanirbhar' vision:

Defence

India has already made a few moves to boost the Atmanirbhar Bharat scheme in this sector.

Defence Minister Rajnath Singh announced last year that the country would put an embargo on import of 101 items over the next four years in an effort to spawn indigenous manufacturing of military hardware.

Singh later went on to say that a country that depends on imports for its military equipment can never be strong and asserted that being self-sufficient in the defence sector is linked to "self-respect" and "sovereignty".

India also inked a deal with Russia to manufacture AK-203 rifles in the country, and will manufacture over 85% of its requirement of some 7.7 lakh units of the rifle.

And while India is taking a welcome step in boosting foreign direct investment (FDI) under the automatic route for defence manufacturers, having boosted the FDI limit to 79% from the earlier 49% in September 2020, the country needs to welcome more private players into manufacturing defence equipment such as arms and ammunition instead of solely relying on Ordnance Factory Board (OFB) and its related tie-ups, such as for the manufacturing of the AK-203.

Needless to say, self reliance in defence, which is one of India's key spending areas in the Budget, will strongly help balance the trade deficit. However, this Budget might be a stepping stone, i.e. key allocation this year might be on setting up of infrastructure for its manufacturing and identifying ways to source the basic raw materials used in arms and ammunition locally.

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Semiconductors

Semiconductors are at the heart of a vast majority of electronics, with the United States, east and southeast Asian nations holding a lion's share of the manufacturing of semiconductor products. India has only a few semiconductor manufacturing facilities, and none of them work on modern manufacturing processes or on a scale viable for mass-production of semiconductor products.

China, a hub for semiconductor-related products, faces sanctions and import bans for several countries now over trade issues. India too is heavily reliant on the country for its semiconductor manufacturing industry, something the government is increasingly trying to change.

The semiconductor market has a global value of over $726 billion as of 2020, according to Fortune Business Insights, but India has a virtually non-existent part of the trade owing to its dated manufacturing process and limited reach.

The Semi-conductor Laboratory SCL, for example, fabricates at 180 nanometer CMOS process, a far cry from the cutting edge 7 nanometer process currently used by companies like TSMC and Samsung Electronics, not to mention ongoing R&D into smaller process nodes.

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As a fledgling market for high-performance semiconductors, India holds large potential to not only consume semiconductor products, but also to manufacture them. To boost India's footprint in the semiconductor business, India should look to bringing companies like TSMC, Globalfoundries and Samsung Electronics to open foundries in the country.

It can do so by offering incentives, such as tax holidays (owing to the large turnaround time required for semiconductor companies to construct factories, get tooling up to speed, bringing output of wafers to scale, along with related R&D), and a short-term (1-2 years) drop in import duties on manufacturing equipment and finished products to whet the market appetite for high-performance semiconductors; currently, India charges anywhere up to 50% in tax on imported semiconductor electronic products when import duties, related cesses and GST are accounted for.

The government had approved two semiconductor units in 2013 with an investment of around Rs 63,000 crore. However, both the units could not be set-up due to lack of electronics manufacturing ecosystem in the country and policy-linked market support.

Manufacturing

Ever since the Modi government came into power in 2014, it has attempted to push local manufacturing under the 'Make in India' programme, which has seen generally lukewarm success. Manufacturing is a key pain point in the Indian economic machinery as India relies heavily on imported goods across various sectors, particularly electronics, telecom and medical equipment.

A Reuters report last week said that India was considering hiking import duties by 5%-10% on more than 50 items including smartphones, electronic components and appliances in the upcoming budget, quoting top government officials, a move that could tap an additional revenue of about Rs 200 - 210 billion.

The move to increase import duties to promote and support domestic manufacturing is most likely to impact imported furniture, appliances and electric vehicle.

The government is also likely to address the issue of inverted duty structure for certain steel products in the Budget next week to boost domestic manufacturing, sources told PTI.

Inverted duty structure refers to taxation of inputs at higher rates than finished products that results in build-up of credits and cascading costs.

The government might remove customs duties on raw materials used for manufacturing of certain flat-rolled products of stainless steel.

Presently the import duty on key inputs for stainless steel flat products - Ferro Nickel and SS scrap -- is higher than the import duty on final goods coming in from free trade agreement (FTA) partners.

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While import duties could be hiked on over 50 products such as cut and polished diamonds, rubber goods, leather garments, telecom equipment and carpet, the customs duties could be removed on select raw materials (like wood in rough, swan wood and hard board) used for furniture manufacturing and copper concentrate.

"Expensive raw materials impact India's price competitiveness in the international market. The country's exports of furniture is very low (about one per cent), while countries like China and Vietnam are major players in the sector," news agency PTI quoted a government official as saying.

The government may also consider reducing customs duties on coal tar pitch, and copper scrap, while raising the levies on certain finished goods like refrigerator, washing machine and clothes dryer, one of the sources said.

The government is already taking steps to boost domestic manufacturing such as introduction of production-linked incentives scheme (PLI) for several sectors including air conditioners and LED lights.

Electric vehicles

Owing to large-scale threat of man-made global warming due to rampant use of fossil fuels, many countries are looking to replacing their petrol and diesel-powered vehicles with either hybrids or electric vehicles. India is no exception to this. With climate goals by countries changing rapidly, India too is likely to incentivise companies that help meet its climate pledge.

In a letter to the finance minister, the industry body of electric vehicle (EV) makers asked FM Sitharaman to either rejig the Faster Adoption and Manufacturing of (Hybrid) and ElectricVehicles (FAME) II scheme or reintroduce FAME I, saying the programme meant to promote EVs in its second avatar has been able to achieve less than 10 per cent of its target.

The Rs 10,000-crore FAME-II scheme which is to be implemented over a period of three years, came into effect from April 1, 2019. It is the expanded version of FAME India I which was launched on April 1, 2015, with a total outlay of Rs 895 crore.

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They also called for a notional 'green cess' on polluting vehicles and use it to accelerate electric mobility, while also seeking reduction of GST on EVs sold without battery.

The Society of Manufacturers of Electric Vehicles (SMEV) had in the past argued that FAME II could not attract customers to shift from polluting petrol bikes to electric two-wheelers, mainly because the preconditions and qualification criteria of FAME-II made the bikes unaffordable to the mass market customer despite the subsidy.

While there are a few home-grown companies tackling the challenge of building infrastructure to boost EV adoption, India lacks the manufacturing might of China and the US in this department. Providing R&D and production-based incentives to EV manufacturers, along with tax benefits to foreign EV makers like Tesla to set up shop in the country, along with short-term benefits for EV buyers in the form of tax rebates or up-front discounts could offer a big boost to the goal of replacing fuel-powered vehicles with electric and hybrid vehicles.

(With inputs from agencies)