$5-trillion: From Ambition to Action

If growth and private investments take off, fiscal deficit should come under control, reducing the need for the government to borrow

AAS THE FASTEST GROWING MAJOR ECONOMY, India is slated to drive global growth. The poise with which India managed the pandemic impact and navigated from a negative growth in the first two quarters of FY21 to positive growth in the next four consecutive quarters deserves praise.

As the Finance Minister presents the Union Budget, she will have the complex challenge of balancing this pace of growth with keeping the fiscal deficit in check, against the backdrop of the likely impact of the new Covid-19 wave and rising inflation. For this Budget, choosing growth to aid recovery will be advisable—if growth and private investments take off, fiscal deficit will gradually come under control with lesser need for the government to borrow.

I make a case for a more calibrated return to fiscal consolidation as a more suited policy at this juncture for the country.

Fiscal Policy: Key to Growth

The latest MOSPI estimates indicate that India’s real GDP growth for FY22 is expected to be at 9.2 per cent. At this growth, India’s output in absolute terms is likely to be about `147.5 lakh crore in FY22, a mere 1.3 per cent growth over `145.7 lakh crore achieved in FY20. The impact of the Omicron wave may pose some hurdles for this growth. With inflation gathering momentum, RBI may be constrained to increase or maintain the current repo rate. Thus, monetary policy may have a limited scope for supporting growth. In this milieu, an impetus on investments and capital expenditure through a supportive fiscal policy is the need of the hour to achieve India’s ambition of a $5-trillion economy.

Fiscal Deficit

The FRBM Act, 2003, envisaged the Centre’s fiscal deficit to GDP ratio to be reduced from 5.8 per cent in FY03 to 3 per cent by FY09. After achieving a low fiscal deficit of 2.6 per cent of GDP in FY08, due to the global financial crisis, it increased to above 6 per cent in the next two years. Since then, it was brought down to 3.4 per cent in FY19. In recent years, it has again exceeded targets due to several challenges and developments including tax reforms like GST and the reduction in corporate income tax (CIT) rates. For FY22, the budgeted fiscal deficit is 6.8 per cent.

The 15th Finance Commission has provided a benchmark glide path for fiscal consolidation that envisages a deficit of 5.5 per cent of GDP in FY23, reducing it by 0.5 per cent in each successive year to reach 4 per cent by FY26. A 4 per cent fiscal deficit can be accommodated for some more years, beyond FY26, though it is higher than the FRBM target of 3 per cent. This is possible because the effective interest cost has been falling over the years.

Expansionary Budget

This year has seen high growth and buoyancy in the Centre’s gross tax revenues (GTR) partly due to the low base effect as also higher nominal GDP growth because of high deflatorbased inflation. In H1 of FY22, GTR grew 64.2 per cent and tax buoyancy stood at 2.7. In the first eight months of FY22, GTR recorded a 50.3 per cent growth. This is much higher than the corresponding numbers in FY20.

Indications are that due to high WPI-based inflation expected in FY23, nominal GDP growth will continue to be higher than the real GDP growth by 6-7 percentage points. Accordingly, the government’s gross tax revenues are likely to increase by 25 per cent. With the robust tax revenues, the government is in a stronger position to accelerate infra spending. But, to meet the fiscal deficit targets, its borrowings should be contained to about 5.5 per cent of GDP in FY23.

Accelerate Capex Reforms

The Centre has announced visionary plans for capex including the National Infrastructure Pipeline (NIP),

National Monetisation Pipeline, and disinvestments. Speedy implementation of these projects will help drive capex in the private sector as well, whose balance sheets are currently deleveraged and looking healthy.

NIP planned an investment of `111 lakh crore from FY20 to FY25 with the objective of improving project efficiencies and attracting investments into infrastructure. With three years about to lapse in March 2022, it is time to assess NIP’s performance in terms of its sectoral targets and financiers. It should be done before the FY23 Budget so that adequate budgetary resources for capital spending may be allocated to make up for deficiencies.

This would also be the right time to redefine the sectoral role as well as investors and recast NIP for the next three years, as NIP 2.0.

The government should be complimented for successfully kicking off the PSU privatisation exercise with the sale of Air India. But the target of realising `1.75 lakh crore through disinvestments may be a challenge. The Centre should focus on early conclusion of strategic sales in other PSUs, especially in the commodity sector. In addition, early implementation of the National Monetisation Pipeline of key infrastructure assets will open fresh opportunities for the private sector to invest in projects. W

Reforms and Ease of Doing Biz

The government has consistently focussed on structural reforms across sectors to address supply side issues and has also improved ease of doing business. These measures must continue to reduce time and cost overruns for businesses.

The government may examine decriminalisation of economic laws for procedural defaults, on the lines of that done for Companies Act and LLP Act. Industry also looks forward to expeditious execution of the reforms already announced.

On the tax front, the CIT rate reduction fulfilled a large aspiration of the business community. Tax rates on dividends for residents should be brought down and capped to 20 per cent to maintain parity with non-resident investors. The current capital gains tax structure needs an overhaul for bringing consistency in tax rates and holding period for different asset classes. The faceless dispute resolution scheme should be implemented at the earliest. The Advance Pricing Agreement mechanism should be strengthened. Regarding GST, legislative reform and rate rationalisation will help achieve its true potential.

Growth Momentum

Despite the pandemic, we are witnessing a buoyant global environment. India has seen a large pie of the emerging market investment inflows over the past year. The private sector is also bullish, much supported by a strong capital market.

By accelerating execution of reforms, ensuring that schemes like PLI take effect on the ground, and by providing for greater capital spend in the Budget, the government has the opportunity to propel the investment cycles. With availability of capital, combined with strong balance sheets of the private sector, the government can address the triple objectives of rekindling demand, growth in the manufacturing sector and employment generation.

WWITH THE UNION BUDGET SET TO be announced shortly, the Finance Minister is faced with the challenge of determining additional avenues for mobilisation of financial resources to support the government’s ambitious infrastructure development and growth targets. Over the past few years, the government has explored various sources of generating revenue to supplement the limited fiscal resources available. Apart from the taxation route, an assessment of non-tax revenues of the government shows a significant rise from 2.7 per cent of GDP in 2014-15 to 5.1 per cent of GDP in 2020-21.

Non-tax revenue generation methods by unlocking investment value of public sector assets to generate capital has been institutionalised through the National Monetisation Pipeline. This programme aims to aggregate the monetisation potential of `6 lakh crore through core assets of the central government over FY2022-25. As identified by the government, the road, railways, power, oil & gas and telecom sectors appear to be amenable to generating large revenue through asset monetisation. Initial success of this drive has been witnessed with NHAI raising `17,000 crore through the toll-operate-transfer mode over the past two years. However, these are still early days.

Having surpassed two waves of the pandemic, and in the midst of the third wave, the case for government intervention to spearhead economic recovery continues to remain very strong. Since around 15 per cent of India’s GDP comes from government expenditure, providing state governments with funds to spend is critical for recovery, as state expenditure has a high impact on sustained economic activity. Both the Centre and the states need to explore additional means to bridge revenue shortfall, in line with their current strategies.

Disinvestment and Asset Monetisation

While disinvestment is a reasonable measure to tide over the revenue shortfall that both the central and state governments are facing, as per the central government, disinvestment of only eight PSUs has been completed from amongst the 36 PSUs selected in 2016. The central government pegged its disinvestment target at `1.75 lakh crore for FY22, over five times what it raised in FY21. While it missed its previous year target by a significant margin in the backdrop of the pandemic, efforts to realise its current year target as much as possible are underway.

There are significant amounts of non-core assets that the government is looking to monetise. According to the NITI Aayog, assets close to about `90,000 crore can be leveraged to generate revenue for the government: • Unused assets in the aviation sector: `15,000 crore Non-core assets in power sector: `20,000 crore Transportation assets—railways, roads, shipping—`55,000 crore The government also intends to establish the National Land Monetisation Corporation to monetise state-owned surplus land assets.

Various public sector undertakings have a lot of under- or un-utilised assets that could be monetised in innovative ways. The Centre may consider incentivising states to monetise these assets in an attempt to generate financial resources. Some of the key sectors under the control of state governments that are amenable to monetisation include: • Tourism: Land assets and properties in enviable tourist locations State mineral resources: Value addition possibilities

State highways: Toll charges Transport: Bus station modernisation, ads on tickets, seats, etc. Municipal corporations: Reassessing rentals of leased properties; monetising buildings and land For revenue-producing assets in

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the future, an SPV model for debtequity raising can be considered. For example, un-utilised land tracts could be put to effective use without the need to sell them. This can fundamentally transform the rate and speed of growth by reimagining the way assets are monetised.

Asset monetisation can help both the Centre and states unlock real value in the economy.

Tax Rationalisation

Over the past few years, the government has undertaken various tax reforms and process simplification measures. Such tax reforms, including reduction in corporate tax rates, giving legal sanctity to the taxpayer charter, use of technology to ensure frictionless interaction for assessments and appeals, introduction of Vivad Se Vishwas (VSV) scheme, etc. have considerably improved India’s image as a tax-friendly jurisdiction. That apart, the GST regime has also witnessed changes on the law and policy front, as well as automation of compliances. These reforms, providing ‘tax certainty’ and ‘ease of doing business’, should eventually lead to increase in tax collections for the government and reduce fiscal deficit.

Taxation of Big Tech

India was an early mover in introducing unilateral measures to tax nonresident digital companies. In 2016, India introduced a digital tax in the form of Equalisation Levy on online advertisements, which was later expanded to cover online sale of goods and provision of services. In the next couple of years, with implementation of OECD Pillar One proposals, the taxation world would witness a complete overhaul of global tax norms. Pillar One implementation would ensure reallocation of a share of profits of the digital companies to the jurisdictions where its users are located. While India expects to garner greater taxation rights over the overseas digital companies’ profits, it may have to withdraw the Equalisation Levy provisions currently in vogue.

Rationalising GST Rates

The government may consider revisiting GST slabs of products in the 28 per cent category, which may only be reserved for purchases that are unhealthy, environmentally harmful and represent extreme luxury. Taxation on aspirational purchases such as consumer durables could be kept in the 18 per cent or lower GST slab. Even for products considered as extreme luxury, elasticity of consumer purchase preferences should be central to determining their GST rate.

The government may also reassess GST slabs based on maturity of sectors. There are sectors that are predominantly still in the unorganised mode (such as house interior works), and where scope for GST compliance is low, both from consumer and supplier sides. Governments may consider reducing the GST slab for such sectors to 5 per cent to encourage inclusion in the tax net.

Tapping into healthier revenue generation avenues at central and state levels will create the fiscal space for the government to ramp up infrastructure spend and development.

The Finance Minister faces the challenge of determining additional avenues for mobilisation of financial resources to support the Centre’s infra and growth targets