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Budget 2022-23 unveiled on 1 February carries forward the government’s vision of empowering Indians and enabling economic activity. The economic vision of the government, since the onset of the pandemic has been based on the following underlying philosophy: ameliorate the sufferings of specific sectors and households by empowering them to ride out difficult times and emerge stronger, so that they can prosper in the boom times to follow. Its long-term growth vision since 2019 has been to revive economic growth through public investment in infrastructure (physical and digital) and reasonable tax policies that encourage capital formation and employment generation.

In particular, the extension of Production Linked Incentive (PLI) schemes is an outcome of the government’s conviction that manufacturing, at scale, must play an important role in ensuring higher economic growth and better living standards for people. The hollowing out of manufacturing in many developed nations has caused social divisions and withering of communities that were thriving earlier. Manufacturing provides more room than services for less-skilled and less-educated individuals to contribute to and gain from economic activity.

Even for relatively less skill-intensive services such as tourism, the near-term prospects are not bright. Statistics on the covid hit to aviation and tourism traffic make for grim reading (bit.ly/3hhRcUt). International tourism is unlikely to ever return to the full extent that prevailed before the pandemic. Thailand has lost so much in tourism that merchandise exports are being relied upon to mitigate the shock. In India, the revival of manufacturing to improve its share of the economy are essential for mass employment and income growth. Upgrading the sector’s prowess and exports while nurturing high value-added service exports are not mutually exclusive.

The Global Trade Update published by UNCTAD (bit.ly/3LLMps6) in February 2022 captures the challenge of relying on service exports, not just for the world but India as well. The report states, “During Q4 2021, trade in goods increased by almost US$200 billion to reach about US$5.8 trillion, a new record. During the same period, trade in services rose by about US$50 billion to reach about US$1.6 trillion, a value just above pre-pandemic levels." The report notes that India’s export of goods was up 25% in the fourth quarter of 2021 over the average in 2019, whereas our export of services was up 7% (third quarter of 2021 over the 2019 average).

In the financial year 2021-22 up to January, non-oil, non-GJ (gold, jewellery and precious metals) our exports totalled $255.7 billion, up nearly 35% over the same period in 2020-21 and 29.2% in 2019-20. Growth in the export of engineering goods in April 2021-January 2022 was higher by nearly 38% over the same period of 2019-20.

Further, the pursuit of greater value addition in manufacturing need not be (and is not) at the expense of labour incomes. Indeed, the government has been pursuing formalization of the economy with a view to improving working conditions, enhancing incomes and offering workers wage security. In the last eight years, several budgets have encouraged employers to hire more workers in formal jobs, with the government providing for the payment of employers’ provident fund contributions subject to conditions and limits. The launch of and rapidly rising enrolment in the E-Shram portal is a sign that the government aims to bring better working conditions, access to many formal benefits available, credit facilities, etc, to millions of workers. All of these should improve their incomes.

An increase in the share of manufacturing accompanied by a steady rise in labour’s share of income is possible if productivity improves. That is where the creation of physical and digital infrastructure and process reforms such as Gati Shakti, which would lower costs of logistics over time, are expected to play a part. Indeed, cheaper logistics would enable goods made in the hinterland to be shipped globally through port cities.

State governments must play their part too. A recent report by the Observer Research Foundation and Teamlease shows that violations of several commercial laws, rules and regulations attract criminal punishment. The majority of these are in the domain of states. The sooner they are reviewed and removed, where appropriate, the easier it would be for entrepreneurs to focus on what they do best—generate jobs and profits, and thus aid economic growth.

The commercial sector, on its part, has to recognize the importance of creating a win-win combination of rising profits and rising labour income. To do so, it has to improve the complexity and sophistication of India’s manufactured products. The Economic Complexity Index, developed by the Harvard Growth Lab, shows that India rose significantly on this index in 2018 and 2019. But we have miles to go. Indian businesses must use the prevailing tailwinds—a low-tax regime, low real interest rates and a regime determined to improve business conditions—to raise their game.

India is not trying to copy China. It is charting an economic destiny consistent with its strengths and aspirations while creating conditions that translate those aspirations into reality.

These are the author’s personal views.

V. Anantha Nageswaran is the chief economic advisor to the Government of India.

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