India: Budget 2024: Key Highlights For Relocating Supply Chains To India

1. INTRODUCTION

On February 01, 2024, Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman (the "Finance Minister"), tabled the interim Union Budget for the fiscal year ("FY") 2024-25 (the "Budget 2024"). The Budget 2024 will be an interim budget which will be effective until the new government is elected, and thereupon the full budget will be tabled in July 2024.

The Budget 2024 reflects the changing economy of India and focuses on boosting the economic growth of the nation by investing in infrastructural development and bolstering its supply chains. The reduced food and fertilizer subsidies, coupled with other budgetary allocations towards infrastructure development demonstrate the continued direction of the government's focus on manufacturing sector.

This Infoalert is in part of the series titled 'Relocating Supply Chains to India: Navigating the Indian Landscape' which can be accessed here.

2. KEY HIGHLIGHTS

2.1 Encouraging foreign investment through bilateral investment treaties:

The Finance Minister stated that the government is negotiating bilateral investment treaties (the "BITs") with the nation's foreign partners, to encourage sustained foreign investment in India.¹ The statement is well timed with the ongoing negotiations of India for BITs with nations such as United Kingdom, European Union, and United Arab Emirates, which will help in encouraging domestic manufacturing, reducing import dependence, and increasing exports.²

2.2 Implementation of railway corridor programs under PM Gati Shakti:

The government has promised the implementation of 3 major economic railway corridor programs, namely: (i) energy, mineral, and cement corridors; (ii) port connectivity corridors; and (iii) high traffic density corridors. These corridors come as a part of 'PM Gati Shakti' program, which is aimed at building multimodal connectivity, improving logistics efficiency, and thereby reducing costs, which would benefit the supply chains by providing better logistics and connectivity at lower costs.

2.3 Bolstering the airport infrastructure under UDAN scheme:

While there has been widespread development of airports and development of new routes to, inter alia, enable connectivity in tier two and tier three cities, the Finance Minister has hinted towards the expansion of existing airports and development of new airports in an expeditious manner, as a part of the existing UDAN scheme. Increased air-connectivity will enhance the efficiency of logistics across the nation, especially for time-sensitive shipments containing goods such as perishable commodities and prescription drugs.

2.4 Building the green energy and electric vehicle ecosystem:

The government has announced a slew of measures in pursuit of its commitment to meet 'net zero' by the year 2070, such as harnessing the offshore wind energy by viability gap funding, setting up of coal gasification and liquefaction capacity of 100 MT by the year 2030, and providing financial assistance for procurement of biomass aggregation machinery to support collection. All such measures highlight India's initiative to support green energy for its industries, which ensures responsible manufacturing from an ecological and sustainable development perspective, in line with the growing environmental, social and governance ("ESG") commitments from all global players. Such measures aid businesses in achieving sustainability in the pursuit of the net zero target, and place India at par with the global standards of implementing robust ESG measures.

The government has also proposed to expand and strengthen the manufacturing and charging infrastructure and has also promised to launch a new scheme of bio-manufacturing and bio-foundry. The aim is to provide environmentally friendly alternatives such as biodegradable polymers, bioplastics, biopharmaceuticals, and bioagri-inputs. In light of the highlighted measures, India will inevitably prove to be a lucrative destination for global players to invest in its green energy and electric vehicle ecosystem, given that under the extant Foreign Direct Investment ("FDI") policy of India, FDI in manufacturing (barring few items in defense, atomic energy, etc.) including in renewable energy sector is permitted up to 100% under the automatic route.³

3. ALLOCATION TO CAPITAL EXPENDITUE AND SUPPLY CHAIN ORIENTED SCHEMES

3.1 Continued increase in capital expenditure:

The total expenditure reflected in the Budget Estimates ("BE") shared by the Ministry of Finance in 2024-25, is estimated at USD 574 Billion, out of which the total capital expenditure is estimated at USD 133 Billion. The steer towards boosting the economic growth of the nation by investing in infrastructural development, is evidenced by the increase of 17.7% in the BE of FY 2024-25 in the effective capital expenditure at USD 180 Billion, over the revised estimates ("RE") of FY 2023-24.⁴

3.2 Notable allocations to existing supply-chain oriented schemes:

4. CONCLUSION

The Budget 2024 is another step in India's ongoing journey for being a lucrative destination for hosting the supply chains and the manufacturing hubs of global players. Lenovo, India's second largest computer manufacturer, is now a part of the PLI Scheme for IT hardware, committing to local production of personal computers. Ola Electric, on the other hand, has secured its second product certification under the PLI Scheme for automobiles, making it eligible for incentives for up to 5 years. These measures have put India on track for localizing the supply chains and promoting investments in domestic manufacturing.

Based on recent surveys, many multinationals have indicated pursuing a policy of 'China Plus One' strategy with Vietnam and Thailand being the primary options for their expansion plans. However, India has also stood out as a frequently mentioned option on account of its workforce meeting the appropriate skillset requirements. The Finance Minister has also recognized the importance of the Skill India Mission and its achievements in the Budget 2024. The Indian government introduced the Modified Programme for Development of Semiconductors and Display Manufacturing in the year 2021, with an outlay of USD 9 Billion, pursuant to which, global chipmaking giant, Micron Technology Inc. has decided to set up its manufacturing facilities for semiconductors in India. India has also partnered with Japan, which has companies that excel at front-end processes and have requisite chipmaking equipment, by signing a memorandum of understanding (MoU) in July 2023 for cooperation in semiconductor supply chain.

The Indian government's economic reforms, like the consolidation of the tax regime into the Goods and Services Tax (GST), have streamlined and optimized supply chains and improved the business environment. According to the January 2024 World Economic Outlook by the International Monetary Fund (IMF), India's growth projection for FY 2023-24 has been revised upward from 6.3% to 6.7%, while the global growth projection remained unchanged at 3%. The effective implementation of the measures taken by the government over the years will help drive foreign investments and promote economic growth. Towards these efforts, it's crucial to prioritize aligning BITs with global standards to prevent treaty cancellations and lengthy negotiations.

With India's impressive growth rates, skilled workforce, and ongoing regulatory incentives, global players are increasingly considering India as a key production and sourcing hub. It remains to be seen whether India will introduce enhanced policies and incentives in this regard in its upcoming full budget following the Lok Sabha elections.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.