The Finance Minister will present her maiden Union Budget onJuly 5. She has asked all citizens to send their inputs, promising that eachproposal will be duly examined. She has welcomed and already thanked all theanticipated contributors to this crowdsourcing. This makes the process moreinclusive and broad-based. Many innovative suggestions may come, and this agood way to tap into collective wisdom. But there is likely to be oneasymmetry. Most suggestions will be about “what to do” rather than “what not todo”. So, in the spirit of joining the crowdsourcing, this column will focus onthe latter.
But first a few observations. Firstly, this won’t be a fullyear budget, as that will be presented in February. Secondly, this is anopportunity for the FM and her government to articulate a broad philosophy,since this is the first year for the newly elected government. The thumpingmajority gives the Prime Minister and his cabinet colleagues enormous politicalcapital to expend on certain decisions, that might involve short term economicpain for long term gain. Thirdly, the budget is going to be presented against abackdrop of escalating trade war, severe drought like conditions, decelerationof GDP growth over three years, worsening fiscal and current account deficits,and of course signs of jobless growth. These are formidable challenges, andsurely one budget cannot be a magic bullet solution to all. The budget ofcourse must make realistic assumptions of the growth path ahead, andaccordingly plan for revenues and expenditure. It has to send signals to boostconsumption, revive private investments, unleash entrepreneurial activity andalso balance the books. These are priorities for every budget, but are morepertinent in the present context.
So here are some suggestions of “what not to do”. Firstly,on widening the tax net, avoid the tendency to backtrack. The Prime Ministerhad publicly announced that he would like the taxpayer net to be at least tencrore. India has one of the lowest tax to GDP ratio, and especially direct taxto GDP ratio in the world. A few years ago, the Economic Survey showed thatIndia was among the last ranked, when looking at taxpayers and voters. Indiahas 7 taxpayers for every 100 voters. This ratio is 100 to 100 for many NorthEuropean countries. We need to decrease this skew. The interim budget presentedin February this year, prior to the national elections, raised the thresholdexemption in such a way, that almost three crore taxpayers went out of the net.This may have been due to electoral considerations, or to boost consumption.But it sends the wrong signal. The direct tax burden can be kept low for lowincome taxpayers, but very few should be out of the net. India should move moretoward progressive direct taxation, and away from relatively high indirecttaxation.
Secondly, please do not raise any more cesses. These are theprerogative of the Union government and are slapped on top of all the directand indirect taxes i.e. GST. The cesscollection is not shared with State governments, and is not in the purview ofthe recommendation of State Centre split of tax revenues, as per the FinanceCommission. The cess is meant to be used only in extraordinary times, but nowaccounts for almost ten percent of direct taxes collected by the Uniongovernment. This is unfair to income tax payers as well as to Stategovernments. Ideally it would be best to abolish cess collection, but if not,at least do not raise them any further.
Thirdly, please avoid sending too many contradictorysignals. One of them is mentioned above, of simultaneously wanting to widen thetax net, and then increasing the exemption limits. The other example is on foodinflation and minimum support prices (MSP). On one hand the government iscommitted to keeping inflation, especially food inflation low and stable. Buton the other hand, it announced last year that MSP would be 150 percent of thecost of cultivation. This is cost pluspricing, which is inflationary. It gives no signal to keep costs low, or toeven have cropping appropriate to climatic and hydrological conditions. Does itmake sense to grow sugarcane in an acutely water stressed area, and still beassured high MSP? It’s a different matter, that MSP was unsuccessful becauseeven though the price was assured, the quantity wasn’t. So, procurement waslow, and farmers’ incomes did not grow as much as anticipated. If you want toaugment farmers’ income do it through direct transfers like PM Kisan Yojana,rather than raising MSP which contradicts the aim of keeping inflation low. Thesame inconsistency is observed on the interest rate policy. The governmentwants them to be low, so as to spur investments in the economy. And yet theadministered rate, payable on Employee Provident Fund is increased. This sendsa mixed signal.
The fourth suggestion is to avoid too many specificexemptions or incentives. The speech should not seem like a long laundry listof budgetary allocations of say 100 crore each, to activities peppered allover. This is too much micro signalling, and such small amounts do not evenqualify to be a second decimal fraction of the budget. These initiatives arebest left to individual ministries, or lower tiers of State and localgovernment. The FM needs to give a broad direction of policy and principles.The details are left to the line ministries.
And lastly please avoid worsening the skew of indirect todirect taxes. Indirect taxes are regressive, and hurt the poor more than therich. India’s income and wealth inequality is already a matter of graveconcern, which was validated by the promises of various political parties inthe recent Lok Sabha election. We need to move to a greater share of directtaxes. Hence GST rates need to be rationalised and reduced, cesses must go,direct tax net must be wider, exemptions should be fewer, and the tax code mustbe simpler. So please avoid going in the opposite direction. Best wishes forJuly 5.
(The writer is an economist and Senior Fellow, TakshashilaInstitution)
(Syndicate: The Billion Press)(email:editor@thebillionpress.org)