Articles and Commentaries |
March 1, 2023

Empowering the Digital Economy through Budgetary Provisions and Policy Signalling

Written By: Jaijit Bhattacharya

Introduction

This Union Budget 2024 continued on the path to enabling increased allocation to digital infrastructure, including Digital Platform Infrastructure, thus ensuring that the Indian economy accelerates towards a lower cost, higher efficiency, competitive economy.

Let us analyse the budget from an overall perspective, before we deep dive into the digital aspects. The announcement of significant tax reductions for the middle class made it a “feel great” budget for the masses, while avoiding populist measures and avoiding unnecessary freebies. It was thus another mature budget presented, with budgetary support being extended to only the vulnerable sections of the society such as those who require food grain support or for MSMEs that are the backbone of the economy and not resorting to mass populisms that lead to fiscal pressures and ultimately to inflation. Hence, in this context, a budgetary support of Rs 2 trillion for food grains is most welcome. In the same spirit, targeting a spend of 2.5% of GSP on healthcare by 2024 is a very desirable step.

The budget appeared to focus on enabling people and small businesses to earn their own living, that is to be economically self-sustaining. In other words, it was a budget that enabled people to be ‘Atmanirbhar’. How does the budget achieve such an objective? The massive capital outlay of Rs 10 lac crore or 3.3% of the GDP ensures that the public sector spend creates the demand for cement, steel, labour, transportation, logistics and so on that would give an opportunity for people to provide the goods and labour. This is further amplified by proposed increase in budgetary support for PM Awas Yojna (housing for all) to the extent of 66%, making it a Rs 79,000 crore outlay. There is also INR 2.4 trillion of additional investments for the Indian Railways, which is the highest in a decade and four times last year’s budget. This outlay is double of what was generally expected. In addition, there are multiple other infrastructure outlays such as 50 new airports and heliports, coastal shipping etc. The multiplier effect of such an unprecedented capital expenditure will ensure that all sectors of the economy grow in an economically sustainable manner.

Along with economic sustainability, there is very significant focus on environmental sustainability, both in terms of moving the economy away from polluting industries and energy sources to promoting production of green capital goods such as batteries, solar power, hydel power etc. To this goal, committing Rs 20,700 crore to generation of 13 GW from Ladakh has repercussions in not only making our energy sources green, but also making Ladakh a green energy hub and increasing local job opportunities in a future industry. There is also a very significant commitment of Rs 19,700 crore to accelerate the green hydrogen industry and a humungous target of having capacity for battery storage of 4 GWH.

As with all Indian budgets, this budget continues to provide significant support to agriculture. Agriculture has grown by a sustained average annual rate of 4.6% in the last six years. However, what is different in this budget is that it aims to steer the agriculture industry towards more sustainable practices such as growing of millets that are natural, indigenous crops for India that require less water, and thus making India the global hub for millets, to moving away from chemical pesticides and fertilisers through 10,000 support centres. I am assuming such a change would be effected responsibly and in a graded manner such that we do not fall into the trap that Sri Lanka fell into by adopting natural agricultural practices in a knee-jerk manner without scientifically sanctified practices for the same.

The budget also continued this government’s quest for enhancing ease of doing business by creating centralised KYC infrastructure and having PAN as single identifier. It also aims to build a Digilocker for companies so that they can have the same benefits as individuals. It also provides significant relief to MSMEs.

The Nudge to Digital

The above steps help in increasing the demand for digital from both consumers and the industry. With extra money in their hands, taxpayers would spend some of it on digital such as access devices (smartphones or laptops), broadband connection, intelligent machines such as smart washing machines etc. The industry too will consume more optical fibre as the large scale housing projects are built-out. In addition, with the push to ensure that fibre optic is laid out with all linear infrastructure, there would be a significant uptick in consumption of fibre optic.

The budget also brought in sharp focus on future industries, be it industry 4.0, with considerable focus on Artificial Intelligence (AI) to the next generation of diamond industry that is driven by lab grown diamonds (LBG) which is environmentally responsible and can feed the massive diamond cutting and polishing industry of India that sustains an army of skilled labour. The budget proposed to leverage digital for multiple sectors, including what caught people’s attention was digitisation of one lac ancient inscriptions, thus democratising the quest for discovering more about our rich cultural and scientific heritage. There is also push for drone adoption, thus incentivising to create future industries.

Specific Provisions for Digital

Besides the nudges to Digital, the budget has specific provisions for supporting Digital. It has allocated INR 16,549 crore to the Ministry of Electronics and Information Technology, which is a 40% higher allocation than that of last year. This allocation includes INR 3,000 crore for the Indian Semiconductor Mission. Semiconductors are the heart of digital and are extremely strategic, as has been made amply clear during the COVID induced semiconductor shortages, which were exacerbated by the Ukraine war. Without semiconductors, most modern manufactured products can come to a grinding halt, as most modern gadgets and white goods are run using semiconductors. This includes automobiles, washing machines, air conditioners, displays, televisions etc. Even solar panels are based on semiconductors. With a giant push towards switching to carbon-neutral energy generation, solar panels have become critical for India and therefore, semiconductors have become even more of a strategic requirement for India. Thus, India having a negligible semiconductor manufacturing capacity requires urgent attention to kickstarting the manufacturing of semiconductors in India. The budget does well in ensuring that we finally get around to pushing for semiconductor manufacturing in India. In December 2021, the government had announced a corpus of Rs 76,000 crore to promote the semiconductor and display manufacturing ecosystem in India. The budget this year signals the seriousness of the government to promote an atmanirbhar semiconductor industry.

The allocated INR 3000 crore corpus includes INR 1,799 crore that has been allocated for the modified scheme for setting up compound semiconductors, silicon photonics, sensors fab, discrete semiconductors fab and semiconductor assembly, testing, marking and packaging (ATMP), outsourced semiconductor assembly and test (OSAT) facilities in India. These are critical for establishing the semiconductor ecosystem in India.

In addition, the budget has allocated Rs 1,000 crore for the modified scheme for setting up of semiconductor fabs in India, while Rs 4 lakh has been allocated for the scheme to set up display fabrication units in India. Such units are required in televisions, mobile phones and other such devices. To back the semiconductor wafer fab proposals by various corporate entities, the scheme involves the central government making a large, upfront investment which would possibly be to the tune of 50% fiscal support as per recent modifications. The budget also allocated INR 200 crore for design-linked incentive scheme to incentivise companies to design semiconductor chips and wafers in India.

The budget also supported the Digital Platform Infrastructure that India has created and is a pioneer in the world. To augment the digital payment capacities, the budget has allocated INR 1,500 crore for promotion of digital payments. This scheme will push banks to develop robust digital payment ecosystem, and to promote RuPay debit card and BHIM-UPI digital transactions across all sectors. Such a move will make the Indian economy significantly more efficient. UPI has grown by leaps and bounds in the past couple of years as it facilitated transactions worth Rs 125.94 trillion in the calendar year 2022, jumping 4X from Rs 33.88 trillion in 2020.

To promote more of electronics manufacturing in India, with more indigenisation of components, the budget has also allocated INR 4,499 crore for the production-linked incentive (PLI) scheme for large-scale electronics manufacturing. The scheme envisages incentives between 3% and 6% on incremental sales of goods manufactured in India. The PLI scheme for IT hardware, which offers incentives between 2% and 4% on incremental sales for goods such as laptops, servers, tablets, and all-in-one PCs manufactured in India, has been allocated Rs 146 crore. These allocations will significantly strengthen electronics manufacturing in India. Such measures have helped India pull back from a situation where it was predicted that by 2016, India’s import bill for electronics will be more than our oil import bill. Instead, we have shot from having almost no production of mobile phones to becoming the second largest producer of mobile phones in the last few years. Such scale up has been unprecedented globally, and the budgetary incentives and PLI schemes have played a significant role. In addition, the budget has allocated significant funds for the modernisation of the semiconductor laboratory at Mohali, while Rs 533 crore has been allocated for other expenditures of SCL.

The budget has also announced support for an open-source, digital public agriculture infrastructure that will facilitate the agricultural sector in the country. A digital agricultural stack, a data repository of the farm sector, is already being built and the new open-source initiative, which will be accessible to the private sector, is expected to be based on it. It is expected that such an initiative will enable inclusive, farmer-centric solutions through relevant information services for crop planning and health, improved access to farm inputs, credit, and insurance, help for crop estimation, market intelligence, and support for growth of agri-tech industry and start-ups.

So clearly, the budget has given a significant push to greater digitalisation of the Indian economy and has also built in sufficient signalling of the path that the nation will take. However, it is important to also understand issues that are not necessarily solvable through budgetary provisions.

What did the industry want?

To understand the impediments to an accelerated digitalisation of the economy, it is important to understand some of the key asks of the digital economy.

The foremost is that we still have large parts of the country that are not connected through broadband. As has been oft repeated, the Wuhan Covid pandemic has made it amply clear that broadband is a necessity for survival. Under such circumstances, accelerating the rollout of BharatNet III Saturation Project, which aims to connect every village with a broadband, is critical. The more time we lose, the more we lose the chance of educating the youth, providing services to the old and connecting the workers to opportunities. Each of these lost opportunities will quickly come back to bite India, as India propels to greater levels of growth and prosperity. We would be staring at problems of not finding appropriately trained workers while having the largest population in the world. We may need to import skilled workers to fill the gap, while not being able to offer jobs to our citizens, as they did not get trained. Therefore, it is imperative that we execute the Bharat Saturation Project on an urgent basis.

In the above context, it needs to be noted that given the criticality of universal broadband connectivity, the government has gone on a war footing on the 4G saturation project, which aims to cover every village in the country with 4G connectivity. However, for such an infrastructure to operate effectively, the towers would need to be connected by optical fibre, which brings us back to the issue of rapid implementation of BharatNet Saturation Project.

In addition, given that the Indian environment takes a toll on the optical fibres been rolled out, it is important that we roll out bend-resilient optical fibres, which do not degrade when bent. Fortunately, India manufactures such fibres domestically, while the poorer quality fibres are imported. It would be beneficial for an atmanirbhar optical fibre industry that India adopts bend-resilient fibre for government initiated projects, which will not only ensure that higher quality infrastructure is created, but will also ensure a future-proof infrastructure, supported by the local industry.

As part of atmanirbhar, the government has taken proactive steps to mandate use of Atmanirbhar products for any component that is a significant percentage of a project. This was part of the Public Procurement Preference to Make in India (PPP-MII) order. However, what we observe is that a project has many components and could include large amount of cement and steel and the digital component such as switches etc, become a minuscule portion of the project. It would be important to fine tune the atmanirbhar policy and use percentage of the product as a key metric to enforce atmanirbhar product, rather than using percentage of project as a metric.

And as dwell on the topic of atmanirbhar digital ecosystem, we see a strange phenomenon happening. While the government has pioneered the much-needed policy of “Atmanirbhar”, we observe that where the industry is getting marauded by dumping from foreign players, with poor quality fibre, there seems to be a laxity in providing the trade remedies required in such cases. In fact, the industry is observing a strange situation where anti-dumping duty cases are being approved and recommended by the DGTR, but the same appear to be rejected by Ministry of Finance. The budget was an excellent opportunity to provide clarity on the issue and on the larger vision of the government, before we again see our industry getting decimated, rather than becoming the capital of digital production globally.

There are also more proactive steps that can potentially be taken to promote digitalisation of the nation. This may include making it mandatory to provide in-building connectivity, especially for multi-storied buildings and low-cost housing, so that it becomes cheaper to access broadband, as it would be cheaper to layout the connectivity while the buildings are being constructed.

Conclusion

The question at the end is always on how the budget will get funded, with the lofty and desirable goals of getting back to the fiscal responsibility targets, gliding back to 5.9% fiscal deficit in the coming year and to less than 4.5% in the year after? Such a fiscal deficit target also makes the inflation target of sub 6% more believable. But where would the Government get the funds to fund this budget? The budget speech was silent on the disinvestment targets. Perhaps the actual budget documents will have the details. Going by previous track record, there is reason to believe that the budget numbers will add up, especially on the back of higher formalisation of the economy which is also reflected in record GST collections. If we are able to implement this budget in the way it has been presented, it would be a great start to the ‘Amrit Kaal’, supporting sustainable agriculture, next generation industries, massive infrastructure rollout and supporting the vulnerable sections of the society, that will further accelerate the growth of per capita income from the current USD 2,500, bringing more prosperity to the common people.

A great budget will have considerable positive impact on India’s journey towards accelerated digitalisation. So, while the government has made stunning progress in steering India towards a path of rapid digitalisation, with initiatives that are path-breaking and first of its kind globally, there is more to be done, given the size and complexity of India. There is also a need to ensure that we continue to keep a hawk-eye on our still young digital manufacturing industry and protect them from unfair trade practices of foreign players.

Author Brief Bio: Dr Jaijit Bhattacharya is a noted expert in technology policies and technology-led societal transformation. A recipient of the prestigious APJ Abdul Kalam Award for innovation in Governance, he is currently President of Centre for Digital Economy Policy Research. He is also CEO of Zerone Microsystems Pvt Ltd, a deep-tech startup in the fintech sector.

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