Experts React: Expectations from India’s Union Budget 2024

Commentary by Mukesh H. Butani, Jayant Krishna, andAkanksha Golchha

Published July 18, 2024

The Indian Union government will announce its Budget 2024-2025 on July 23. This will be the first full budget to be released by the Modi 3.0 government. It will be instrumental in setting the tone for and confirming the priorities of the government's five-year term. In this piece, CSIS experts provide their analyses on tax reforms, education and skilling, and clean energy for the upcoming budget.

Increasing Compliance, Simplifying GST, and Improving International Tax Cooperation | Mukesh Butani

Strengthening Implementation of the National Education Policy 2020 | Jayant Krishna

Green MSMEs, Green Jobs, and the Circular Economy | Akanksha Golchha

Increasing Compliance, Simplifying GST, and Improving International Tax Cooperation

Mukesh Butani, Senior Associate, Chair in U.S.-India Policy Studies

As the new government's first full budget, the Budget 2024-2025 will need to reorient efforts on good governance and managing fiscal deficits. The budget should focus on increasing compliance, modifying the goods and services tax (GST) regime, and improving international tax cooperation.

The budget should further simplify the extant tax structure in India, possibly with an announcement of a new Direct Taxes Code. Such enhancements should ideally promote savings or investments, aligning with broader economic goals like fostering innovation. The budget should proactively stride toward addressing the serpentine tax litigation cycles. Negotiated settlements for large taxpayers could be a move in the right direction. The budget must also make necessary changes to the transfer pricing regime to ease foreign transactions. The inter-percentile range rule should be aligned with international interquartile range rules for cases where a price adjustment is not possible, in turn aligning Indian transfer pricing regulation with international practice.

The budget could herald a future-fit tax function that could entail tax compliance and transparency. While the "Startup India" initiative has provided valuable support, a significantly larger dedicated fund is needed to truly propel India's AI and other frontier technology sectors. Tax breaks, extended concessions, and a dedicated tax policy endeavour would align with India's development goals.

Outcomes from the 53rd Goods and Services Tax Council Meeting, including proposals for rate rationalization and the issuance of clarifications on certain goods and services, are expected to make headwinds. A sunset clause for anti-profiteering measures under the GST seems to be a shoo-in. While this will be on the agenda of the GST Council, the budget could signal movement in this direction.

Internationally, India's trifecta of source ascendancy, design simplification, and uniform methodology will be designed depending on how it prepares for the adoption of the "Global Anti-Base Erosion Model Rules" (Pillar Two of the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Project). Robustness in tracing and maintaining multinational enterprise-specific data will go hand in glove with the tax administration efforts. Whether India adheres to international tax cooperation under the aegis of the United Nations remains to be seen. The budget will be released a week before the July session of the UN meetings, and India's policy stance will be monitored by experts around the globe.

Strengthening Implementation of the National Education Policy 2020

Jayant Krishna, Senior Fellow, Chair in U.S.-India Policy Studies

Only three Indian universities feature among the top 200 universities of the QS World University Rankings 2023. India requires not only better academic standards in higher education but also enhanced research spending and greater ease of conducting research. The Budget 2024-2025 provides an opportunity to reorient India's attention to improved implementation of the National Education Policy 2020 (NEP 2020) to support education, skilling, and research and development.

NEP 2020 focuses on restructuring school education to allow for vocational training, emphasizes early childhood education, and promotes multilingualism. NEP 2020 also presents higher education reforms, such as the introduction of a four-year multidisciplinary undergraduate program, flexible entry and exit from college programs, and a single regulator for the sector. The policy also focuses on greater integration of education with technology, particularly considering the availability of online and AI-powered educational resources.

NEP 2020 recommendations are radical and require financial resources, staff recruitment, infrastructure augmentation, and technology support. However, public spending on education and skill development in India is barely 3 percent of its GDP. At this spending level, India's demographic dividend will remain elusive and an unrealized opportunity, also pulling down its Human Development Index score significantly. Considering these challenges, the government should eventually spend at least 6 percent of its GDP on education and skill development.

Strengthening India's educational system will open pathways for improved advanced research, which is critical for several of India's high-tech manufacturing ambitions, such as those related to AI and semiconductors. Currently, India barely spends 0.64 percent of its GDP on research and development in science and technology, the lowest among all major economies. This should be gradually enhanced to 2.5 percent. The Anusandhan National Research Foundation also should be operationalized broadly on the lines of the National Science Foundation, an independent U.S. federal agency that supports science and engineering across all states and territories.

Green MSMEs, Green Jobs, and the Circular Economy

Akanksha Golchha, Fellow, Chair in U.S.-India Policy Studies

The previous financial year witnessed substantial investments in the renewable energy sector, accompanied by a plethora of government schemes ranging from demand-side subsidies for electric vehicles, biogas plants, and rooftop solar systems to supply-side incentives such as production-linked incentives for solar photovoltaic modules, batteries, green hydrogen, and electrolyzers. The Interim Budget 2024-2025 reaffirmed India's commitment to achieving net-zero emissions by 2070. As the PM Surya Ghar, the government's ambitious rooftop solar scheme, has encountered challenges and electric vehicle sales are dwindling, reforms are expected to address these issues. Additionally, offshore wind, green hydrogen, sustainable aviation fuel, and biofuels can stimulate investment in the sector. Building on its successes, the government should focus on solarizing micro, small, and medium enterprises (MSMEs), upskilling for green jobs, and product refurbishment.

Following the revamp of the residential rooftop solar sector, now is an opportune time to introduce a special scheme for India's 63 million MSMEs. The outcomes of this initiative could be far reaching-for example, the initiative could reduce the cost of energy for MSMEs while advancing India's renewable energy goals.

In addition, a focus on growth-enabling reforms for job creation in the renewable energy sector could help the sector meet the employment targets set by the government under various schemes, such as the target of 0.6 million jobs set under the National Green Hydrogen Mission.

India has been recording its hottest temperatures this year, underscoring an urgent need for infrastructure development to meet heightened cooling demands, which is particularly necessary to build resilience in communities most vulnerable to the impact of heat. On the other hand, India is making significant strides toward the "right to repair," which supports environmental sustainability. Providing financial incentives for this initiative would help create the necessary ecosystem for the repair and refurbishing market. The budget, while providing additional incentives for emerging technologies, should focus on designing incentives to address the socioeconomic challenges emerging due to climate change.

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