Focus on incremental reforms

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Focus on incremental reforms

Focus on incremental reforms

Articles
Jul 03,24

According to a recent report of DSP Mutual Fund, the manufacturing sector's contribution to India's GDP is anticipated to rise from 14 per cent in FY24 to 21 per cent by FY34, bolstered by lower logistics costs and improved infrastructure. The manufacturing sector, driven by the Production-linked Incentive (PLI) scheme, is projected to expand threefold, reaching a market size of $ 1.66 trillion from the current $ 459 billion (FY24). However, this is easier said than done.

The government announced PLI schemes for 14 sectors in 2021 with an outlay of Rs 1.97 trillion. According to government data, PLI schemes have attracted over Rs 1.06 trillion investments till December 2023. While the scheme showed excellent results for the mobile manufacturing sector, the response has been tepid in sectors like IT hardware, auto, and auto components, textiles, and ACC battery storage. As per latest estimates, total disbursement of incentives under PLI schemes touched Rs 100 billion, but was mostly in just a handful of sectors. Now, the National Democratic Alliance (NDA) government, which recently assumed power for the third consecutive term under the leadership of Prime Minister Narendra Modi, is reportedly planning to tweak/change the terms of PLI schemes to make them more effective.

Inverted duties and confusing GST rates on products from same sector complicate things further. Basic customs duty structure, which affects $ 680 billion worth of imports, has not been reviewed in 20 years. This has led to over 27 different duty rates and over 100 specific or mixed duty slabs. Currently, 85 per cent of customs duty revenue comes from less than 10 per cent of tariff lines, while 60 per cent of tariff lines contribute less than 3 per cent of revenue, according to the Global Trade Research Initiative (GTRI). The new government needs to take steps to simplify the customs duty structure for ease of compliance.

As the industry celebrated MSME Day on June 27, the government needs to reinvigorate the micro, small, and medium enterprises (MSMEs) sector, which has been going through a challenging time in the recent years. One of the demands of the sector is the revision in the Section 43B(h) of Income Tax Act that mandates payment to Micro & Small Enterprises (MSEs) within 45 days. SME magazine had covered this topic extensively in its Cover Story of June 2024. Experts expect the Finance Minister Nirmala Sitharaman to make favourable changes in this rule.

After focusing on the key reforms in the last five years, experts believe the NDA Government in the third term will have to focus on the execution to accelerate manufacturing sector's growth with emphasis on generating jobs and increasing India's market share in the global trade pie. With India standing on the cusp of a transformative era, the need for comprehensive economic reforms has never been more urgent. The coalition government may not be able to take progressive reforms (like land, labour, agriculture, etc). So, instead of wasting its energy on big-ticket reforms, Modi 3.0 should focus on less contentious issues (like the few mentioned above), which can be equally effective in triggering growth.