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In the second episode of our pre-budget 2025 series, we discuss expectations of India’s manufacturing sector and its key role in India's growth story with EY India Tax Partner Ajit Krishnan. Tune in as explore the anticipated policy measures, tax incentives, and sustainability initiatives that Union Budget 2025 may feature to reshape the future of Indian manufacturing.
Key takeaways
The government may consider expanding production-linked incentives (PLI) for pharma, electronics, textiles and auto in Budget 2025, strengthening India’s manufacturing capacity and global competitiveness.
Increased capital access, tax reliefs, and targeted funds for MSMEs can help boost their resilience and foster sectoral growth.
Proposals around green manufacturing initiatives, tax breaks, and energy transition funding in Budget 2025 will highlight India's commitment to sustainable development goals.
Fiscal support for R&D is vital; development-linked incentives for semiconductors and chips can drive investments and boost India's self-reliance.
Ajit Krishnan
Tax Partner, EY India
For your convenience, a full text transcript of this podcast is available on the link below:
Ritik
Welcome to the EY India Insights podcast. I am your host Ritik, and you are tuning in to our Budget 2025 series. Today, we are taking a closer look at the Union Budget for financial year 2025, with a special focus on the manufacturing sector and some critical tax highlights.
To help us unpack the key themes shaping India's growth story, we are joined by Ajit Krishnan, who is a Tax Partner at EY India and our guest for today's podcast as well. With nearly 30 years of experience, Ajit has a wealth of knowledge in strategy, transactions and tax services that is sure to bring clarity to the final details of this year’s much awaited budget. So, whether you are looking for insights into policy, economy or the tax landscape, you are in the right place.
Without any further ado, welcome to the Budget 2025 series, Ajit.
Ajit
It is an absolute pleasure to be here, Ritik and I really look forward to sharing my perspective. On a lighter note, 30 years sounds really long; I would rather say three decades.
Ritik
Thanks a lot for being here with us today. We look forward to your resourceful perspectives. We are very well aware that the budget season is always abuzz with predictions and expectations, and this year absolutely is no different. Zooming in specifically on the manufacturing sector, what policy measures or incentives can we expect in Budget 2025 to bolster manufacturing growth, particularly in line with Make In India and Atmanirbhar Bharat initiatives?
Ajit
Let us kick things off with a bit of fun. There is a buzz among the Indian diaspora that is really hard to ignore. It seems that numerology and the touch of divine hope are stirring up some huge expectations for the year 2025, because all these numbers add up to nine. And let me tell you, my inbox and social feeds have been swamped with messages echoing the sentiment.
So, riding on this wave of optimism, there is a palpable excitement about what Budget 2025 might bring. Now let us get down to some business. For the first time in over a decade, there is a sustained push to boost India's manufacturing sector. This is really a big deal. It is about creating jobs and building a self-sufficient India, especially in the face of global geopolitical shakeups, which we are seeing.
At EY, we are confident that the government will continue to strengthen policy measures to invigorate manufacturing, which is crucial in today's unpredictable global economy. To put it in perspective, we are looking at three major expectations from the upcoming budget. Firstly, we anticipate an expansion of the production-linked incentive, commonly called PLI scheme to key industries like pharmaceuticals, electronics, especially semiconductor chips, textiles, furniture and automotive.
This move is really designed to bolster India's capacity to snag a larger slice of the global trade pie, while also meeting domestic demands. Secondly, there is hope, though very little, of bringing back the enticing 15% concessional corporate tax rate for new manufacturing setups, a step that I fundamentally believe could turbocharge growth. And thirdly, we are hoping for a simplification of compliance procedures to smooth the path for businesses, coupled with significant investments in physical infrastructure to streamline the flow of goods and services.
There you have it. Three big things that could shape the future of India's economy.
Ritik
That was very insightful, Ajit. It is clear that the government's emphasis on manufacturing has been steady over the years. Speaking of incentives, there is always curiosity about the kind of support manufacturers might get in terms of tax and investment. Are there likely to be any new tax incentives or extensions for manufacturing sectors to attract domestic and foreign investment under the manufacturing budget?
Ajit
Let us delve into the financial strategy at play here. The government appears to have the fiscal room to roll out some attractive incentives, but experts are split on the best approach. On one hand, slashing the corporate tax rate to 15% is a clear draw for businesses and aligns also with the global BEPS pillar two guidelines, making it a solid move in the international trade arena. On the other hand, the direct cash benefits from PLI scheme are tightly linked to boosting capacity and utilization. While a lower tax rate is a marathon runner, it promises long-term benefits, PLI incentives are sprinters, offering immediate boost to capital spending and attracting investments from both domestic and international sources. The key, I believe, is finding a sweet spot between short-term and long-term incentives.
It is a waiting game to see how this plays out, but I can tell you industry and capital markets would be ecstatic if both incentives were realized.
Switching gears, let us also talk about the lifeblood of innovation – fiscal support for research and development. This is where the game changer lies for the economy. Development linked incentives, particularly for sectors like semiconductors and chips, deserves a hefty budget allocation to drive investments and push us towards greater self-reliance, aka Atmanirbharta.
Ritik
Absolutely, Ajit. A balance between immediate benefits and long-term incentives is crucial for sustainable growth. Moving on to another area that has a significant impact on manufacturing - custom duties. How might changes in customs duties highlighted in our Budget 2025 impact manufacturers, especially those relying on imported raw materials or components?
Ajit
We have considered various global trade simulations, weighing the pros and cons of importing from a Free Trade Agreement (FTA) country versus local manufacturing. Customs duty, if you see traditionally, have been the balancing act for local manufacturing against GST impact, but FTA concessions and better capacity utilization abroad has sometimes left the local industries at a disadvantage. Governments have traditionally tried to counter this with measures like anti-dumping duties, but their effectiveness is still up for debate. With the US president elect especially signaling a fresh, completely different and radical approach to tariffs, it is clear India needs a more holistic strategy for global trade, one that just goes just beyond customs duties.
Moreover, there are significant funds tied up in customs litigation and lack of full digitization in the compliance activities; so, a comprehensive overall is in order. The industry is very eager for a clear roadmap on FTAs and their impact, with recent agreements showing promise and some of the older ones, particularly with the ASEAN countries, potentially needing a re-evaluation.
The focus, therefore, should be on enhancing export competitiveness, ensuring that duty refunds are fast, efficient and, more importantly, free from undue scrutiny.
Ritik
That is a fascinating point, especially about revisiting older FTAs and improving export competitiveness. Another vital part of manufacturing ecosystem is definitely MSMEs, which have shown remarkable resilience in recent times. What relief measures or tax benefits might we expect for MSMEs in manufacturing to improve their competitiveness and resilience, particularly under the defense and auto budgets?
Ajit
In the aftermath of the pandemic, it is impossible not to applaud the government's robust support for the MSME sector. These small and medium enterprises have shown an incredible amount of resilience and agility, becoming a cornerstone of India's economic recovery. We witnessed an impressive uptick in companies with turnover soaring past the INR1,000 crore mark, a clear sign of the entrepreneurial vigor that is deeply rooted in the Indian way of doing business.
Looking ahead, there is a real opportunity to amplify this momentum. I am talking about capital gains tax relief and better access to capital markets. These measures could be real game changers, empowering MSMEs to restructure, attract private equity, and open the doors for society at large to invest in and share in the success.
But let us also consider the other angle the government's budget allocation for defense, automotive and maybe railways; there is really a strong case to be made for reserving a portion of these funds specifically for SMEs. This is not just about creating an addressable market. It is also about recognizing the potential of these enterprises to contribute significantly to these sectors. Sure enough, the public procurement policy touches on this, but there is a lot of room to push the envelope further.
The linchpin, however, is access to capital. Without it, even the most ambitious MSMEs hit a wall. And it is not just about money. It is about building the capacity to meet higher quality standards and deliver goods and services at scale. We really need to harness local talent and resources to meet these demands. So, as we look to the future, let us champion the cause of MSMEs and give them the tools they need to thrive. Because when they win, we all win.
Ritik
Absolutely! The resilience of MSMEs is truly commendable, and it is actually exciting to think about how Budget 2025 might support them further. Speaking of future-oriented initiatives, sustainability has become a defining factor in modern manufacturing. As we move towards the final segment of our podcast today, we would like to rest the case with a question on green manufacturing. With a growing emphasis on sustainability, could the government introduce specific tax breaks or policies to promote green manufacturing and cleaner technologies in the climate budget?
Ajit:
Despite a global slowdown in the sustainability agenda, especially post COP29 at Baku, businesses remain steadfast in their commitment to Sustainable Development Goals. They are driven more by customer and investor expectations and less policy. India stands to gain by offering some targeted tax breaks, but more importantly, increasing funding for its energy transition plan, as well as to support clean technologies.
I am quite optimistic that the government could consider establishing a fund, or a fund of funds to channel more green capital, similar to the SWAMIH Fund’s approach to real estate or startup financing. The immediate need, however, is a clear taxonomy defining green investments. With considerable progress made in the last year, we are really eager for the government's strategic announcements in this critical area.
Ritik
It was an absolute pleasure to gain such deep insights from you, Ajit. It is clear that Budget 2025 holds a lot of promise for India's manufacturing sustainability goals. Thank you again for joining us on Budget 2025 Series.
Ajit
Thank you to, Ritik. It is always and will be a pleasure to be here with you.
Ritik
Likewise. To our dedicated listeners, your engagement is what makes this series a success. Continue to follow the EY India Insights podcast for more expert analysis as part of our Budget 2025 series. Make sure to subscribe for the most current updates and insights. Until we convene again, I am Ritik, your host, signing off. Thank you all for tuning in and we eagerly await your company in the next episode.
