How to make the most of a resource constrained budget
Given the state of the economy and the limited room for further taxation, the government WILL DO WELL TO CONCENTRATE ON LOCATING RESOURCES TO FINANCE A DECENT SIZED PRO-GROWTH BUDGET BY LOOKING ELSEWHERE. SELLING A SIGNIFICANT AMOUNT OF FAMILY SILVER, AS THE PUBLIC sector disinvestment is currently perceived, might be one such route to go.
Almost all Union governments, irrespective of their political leanings, have been prone to over-estimating the anticipated pace of economic growth and the tax revenues derived from it. More recently, the NDA government too has succumbed to this temptation and has frequently seen its budgetarymath go awry; necessitating a midway scramble to scale down public income, along with the aspirations and assurances advanced. In the next fiscal Budget, Finance Minister Nirmala Sitharaman must guard against such exuberance, and also anchor the budget in the new ground reality.
The Indian economy has been badly bruised by Covid-19. It may end the current fiscal with 8% negative growth and per capita income decline of 6%. While the green shoots of social and economic recovery are there, unfortunately the pandemic is going to be around for the better part of this year too. Addressing its consequences, a few known but most still shrouded in uncertainty including many aspects of universal vaccination, would take away significant societal efforts and resources from other initiatives.
Hitherto the Union government has shown restraint and prudence in its response to the pandemic and focused its limited resources on citizens and causes most impacted. It endeavoured to mitigate those with notable economic leverage rather than pander to the loudest voices or with closest access to decisionmakers. This was a welcome break from the past. In dealing with the 2008-09 global financial crisis for instance, the then masters had let the public sector banks go wild opening up their coffers, a “generosity” the ordinary Indian is still paying for.
The consensus amongst policymakers, businesses and rating agencies is that the tide would turn in the latter half of 202122. Whether this will be V shaped depicting a fast recovery, U shaped with a more gradual bounce back, or K shaped with corporates and higher income households having stronger balance sheets recovering robustly while smaller businesses and poorer households remain trapped in pandemic led poverty and indebtedness, remains an unanswered question. Bringing it back to its path of buoyant growth, as witnessed during the first decade of this century, must remain the highest priority.
With a depressed 202021 GDP as the base, while mathematically it should be easier next year to attain a near double digit growth rate, in real terms this implies merely returning to where the economy was at the beginning of 2019-20. A host of resolute actions including evolving the requisite regulatory framework are warranted for sustaining the pace of growth in the medium term. Alongside, the government must cautiously walk the tightrope, balancing the growth concerns with fiscal prudence.
Assuming a FY22 turnaround with a nominal GDP growth of 13.5% (real GDP growth plus inflation) and Gdp-tax ratio of 10.7% (the average of last 5 years), gross tax revenue would be Rs 23.65 trillion i.e. 14% higher than the likely collection this fiscal of Rs 19.24 trillion with 9.88% Gdp-tax ratio. The estimation presumes a near status quo in tax rates, no significant tax cuts, additional taxes or increases except broadening of the tax base, both direct and indirect.
Excise duty collection saw 46% increase between April-december 2020 and will remain the centrepiece. The Budget may impose further taxes on “sin goods”, petrol and diesel, the implementation of e-invoicing of GST for all, speedy tax refunds to avoid working capital blockages, and perhaps a more conducive foreign trade policy to boost growth. It may be followed by the GST Council opting for including one or all the hitherto excluded items, viz. petrol, alcohol and real estate.
Last November, excise collections grew 47.7% on the back of a steep hike in taxes on petrol and diesel, personal income tax 35.7% and customs duties 9.2%. In December, GST collections touched a record Rs 1.15 tr. Further hikes in import duties on several products, particularly for which the Production Linked Incentive Scheme under the Atam Nirbharta Mission are likely.
A recovery in direct tax buoyancy from the current year’s minus 1.21% to plus 1.59%, already experienced in a normal year like 201819 is not unreasonable to assume. Rationalisation of direct taxes had been undertaken in 2018-19 when corporate tax rates were slashed from 35% to 25% and further lowered to 15% for firms relocating from overseas. The expectant benefit of higher corporate investment, however, has yet to materialise even though these rates are comparable to ASEAN levels, and attractive enough for investors expected to move out of China. No significant further changes in corporate taxes are expected in the Budget.
To spur general investment, tweaking of capital market instruments such as long term capital gains on equities, TDS on REITS and taxation of dividends is not ruled out. The large middle income group has sought reduction in the applicable rate in the Rs 5-10 lakh slab from 20% to 10%. Women taxpayers look forward to restoration of the erstwhile separate lower tax rates, while the youth look out for cheaper education loans as in the past.
On populist considerations, the Finance Minister may concede a few such demands. Surprisingly, a section in India invariably yearns for lower personal tax rates, while not protesting when the regressive indirect taxes such as GST are increased and citizens across the board made to bear it. The Budget might offer a new direct tax dispute resolution framework to contain disputes and resolve at an early stage, rather than letting them fester till the late stages of litigation. Last year, Rs 8 trillion stood locked up in disputes with taxpayers.
Given the state of the economy and the limited room for further taxation, the government will do well to concentrate on locating resources to finance a decent sized pro-growth budget by looking elsewhere. Selling a significant amount of family silver, as the public sector disinvestment is currently perceived, might be one such route to go. With each case of disinvestment though, we need to be transparent with a goal to effectively privatise the management of the assets rather than take half-way measures only to bridge the year end fiscal deficit.
Well run and listed CPSUS like Bharat Petroleum, Container Corporation and others such as Life Insurance Corporation, Shipping Corporation, Air India, Hindustan Aeronautics are “sellable” assets that can fetch the exchequer good value given the ongoing equity market uptick. However, unlike past endeavours, particularly in selling off the national air carrier, impractical conditions of not allowing reduction in staff, prohibiting merger with the buying entity, or imposing compulsion to assume the entire debt liability, must be eschewed. Corporatisaion of Indian Railways should help in fund raising for rail expansion and modernisation. Realising Rs. 3 trillion through this route is not a far-fetched assumption.
Raising more money abroad is another option, particularly in reducing the future debt liabilities. Borrowing rates in advanced economies are at a record low, and China is no longer the sole attractive place to invest or lend to. Particularly for infrastructure building, India could work on getting additional foreign funds, and where required, make use of sovereign guarantees or its variations. Merely because government’s contingent liabilities would increase, or the ratings decline, is not cause enough to avoid it. The newly raised debts be earmarked for capitalformation and expended on creating revenue yielding assets. India’s track record of meeting debt-obligations is good, and RBI has a decent foreign currency reserve to service them.
States need to be permitted to borrow more, perhaps up to 5% of their SGDP (their total deficit this fiscal would become 5% of national GDP). This is particularly timely because while their requirements for funds have soared, the Centre, despite the 14th Finance Commission’s recommendations, has been shrinking, both the divisible pool of taxes and the share of Centrallysponsored schemes in its total transfers. During the pandemic, most states have cut back on capital expenditure. That in the long run is an untenable position. Such a move, with conditionalities similar to countryborrowings abroad, would facilitate states to invest in infrastructure.
Along with these moves, the government must consciously work on making the country more investor friendly. Apart from creating special windows for big ticket FDIS, resisting retrospective taxation and the eagerness to take commercial disputes through the entire gamut of possible litigation (including to the Supreme Court or the International Court of Justice) primarily to satisfy domestic critics, is imperative. Giving investors an alternate and quicker dispute resolution mechanism commonly followed in international business would facilitate the flow of foreign capital, both equity and debt. Otherwise, our continued reliance on domestic capital, which is both finite and hugely expensive, will keep the Budget smaller than the situation warrants.
Resorting to a fiscal deficit, even twice the FRBM Act limit of 3% of GDP, and perhaps going even a little further this year because of the shrinkage of denominator GDP, is understandable. As long as the money raised is spent prudently with defined medium and long term goals, and there is transparency and the required promptness, lenders—both domestic and foreign—can be expected to follow along. No doubt we will have to keep an eye out on the inflationary potential in infrastructural projects with long gestation. However, as long as the prices of wage-goods, particularly food, fuel and essential clothing are simultaneously kept within a range and their availability consistently improved, this is a risk worth taking given our current reality.
Dr Ajay Dua, a developmental economist by training, is a former Union Secretary.