The Front-line Issues before the Budget

Many have already forecast that the Budget would be a revolutionary one, filled with bouquets for all segments of the society including the common man. This kind of prediction is being made against the backdrop of (a) the government’s resource position is good riding on the back of demonetization and allied revenue-augmenting drives, (b) the government is keen on ameliorating the side-effects of the demonetization on the common man and (c) to encourage people to move over to ‘less cash’ modes of transactions. In addition, the corporate sector is expecting a lot of goodies as it is still stuck in the morass of sluggish growth despite large relaxations on the interest rate front unleashed by RBI over time.

However, in our opinion, this is a budget which is being framed against a highly volatile global environment that chiefly includes change of regime in the US where economic nationalism is on the way of triumphing over globalization and multilateralism; Brexit becoming operational sooner than later; delayed recovery in the EU area; rising crude prices; China exhibiting early, albeit unsteady, signs of coming out of woods; and last but not least, likelihood of world trade maintaining its sluggishness in the near future. Therefore, besides the domestic issues, the Budget must, inter alia, enunciate policies to address these offshore concerns and their offshoots from a medium-term perspective.

No budget is apolitical. Therefore, yes, the Budget will keep in view the forthcoming State elections that includes (the) UP. Therefore, to that extent, it would be na?ve to expect the Budget to be devoid of populist announcements. Economically, inadequate domestic demand constitutes the major constraint, which was exacerbated by demonetization that ultimately pushed down the growth rate. Therefore, regaining the lost momentum and building on that should be the prime mover for the Budget. Secondly, unemployment continues to swell, which is yet another factor abetting low demand conditions. Thirdly, the financial condition of the public sector banks continues to be dismal with each of those always vying with the other to get a larger pie of recapitalization. With credit deployment showing no distinct sign of take-off, banks’ attempt to push up their profits by generating increased fee-based income is largely predicated on cross-selling and digital transactions. Politically also, there are several challenges, especially at regional or State levels.

Given such a relatively complex and not-so-congenial environment, the Budget has to be really inventive as well as innovative. Therefore, instead of merely announcing financial allocations for various sectors and stereotypic taxation measures, it has to define some ‘cornerstones’ and chart out a blueprint to ‘build and bolster’ those with a view to accomplishing the overall objective of growth with equity and higher standard of living, leaving aside treatment of inflation as the combined responsibility of both the government and central bank.

In view of the above, the task before the Budget should be to create enough demand and for this, it has to focus on generating employment and increasing the employability (both skilled and unskilled), rather in a durable manner. This is possible if it embarks on a massive capital expenditure plan, especially focusing on building world-class infrastructure, be it in rural or urban areas, educational or health or supply chain infrastructure, etc. Therefore, the FM is required to loosen the strings of his purse. He should put on hold for a year or two the strict, rather obsessive, adherence to deficits targets. Views in favor of this approach have emerged in the FRBM panel which has just submitted its report.

Leashing deficits is undoubtedly good, but there is little meaning in ‘strictly’ adhering to the deficits benchmarks when expenditure curtailment leads to burgeoning unemployment and constrains capacity build-up in several critical sectors like social security, law and order, education, judiciary, sanitation, health and transport. In other words, the ultimate objective of controlling deficits should be inclusive of improving the quality of human life. In fact, if public expenditure is properly targeted and utilized by sealing the leakages, there would not only be less need for increasing tax rates but also the economy’s capital-output-ratio will improve and more private investment can be attracted.

Disposable income with the people must increase in order to boost production via demand generation. This calls for revamping the individual income tax systems and procedures. Some of the anticipated measures floating in the media include hike in the tax exemption limit, lower tax rates and increase in the taxation limit for interest income from bank fixed deposits. In addition to these, we propose as follows: (a) making 100% of health insurance premium paid and 50% of the principal component of Education Loan repaid tax-free, (b) exempting citizens above 75 or 80 years from payment of income tax and (c) enlarging the tax base on a war footing by bringing into the tax net a substantial chunk of economic activities that are now tax-exempt, either by convention or anything else, but rather irrationally.

It has been the demand for ages that tax rates and procedures need to be conducive to more compliance and the tax proceeds utilized for purposes that improve quality of life such as education, health, sanitation, safe drinking water supply and public transport. If that is done, occasions would not arise for imposing several kinds of cess which is not a progressive phenomenon in a welfare state.

The same goes in respect of Corporate tax. Corporate tax regime needs to take full cognizance of the swift transformations that are taking place in the industry and services sector. E-commerce and Start-ups are a case in point. Developments, especially in the areas of Robotics, Artificial Intelligence and Data Analytics are impacting in a solid way. As it is being stated by many, perhaps another industrial revolution is slowly but steadily gathering pace and the Budget should be strategically well prepared to welcome it.

Putting in place taxation rules is one thing and enforcing the same, effectively and honestly, is another. Probably, the demonetization move would not have been necessary if the enforcement over the decades gone by had been more proper. Generation of unaccounted money in any country is necessarily an evil byproduct of anachronistic or misdirected rules and regulations, especially in taxation area. Therefore, if generation of black money needs to be plugged, rules and regulations have to be either relaxed or tightened in sync with the changing times.

The Budget must indicate a clear path to restructure the public sector banks. Having several zombies around only serves the purpose of making the entire system increasingly vulnerable. Secondly, the ‘tradition’ of Recapitalization needs to be phased out. Perhaps, the Budget should revisit some of the unimplemented, but still possessing topical relevance, reforms of the Narasimham Committee (I and II) or set up another High-Powered committee to look into the banking system recast much more comprehensively, objectively and durably than is being done at present.

What should be the role of Budget as to motivating people to increasingly use the Digital payment channels? As far as these channels are concerned, let us not be irrationally exuberant; rather move in a calibrated fashion because economic habits are die-hard and do not change as fast as it is being made out to be. Secondly, the proposal by the Chief Ministers’ Panel to provide ‘subsidy’ for popularizing digital modes needs to be nipped in bud. A subsidy culture, as the country has experienced, will eventually turn out to be a millstone around the government’s neck which it will find extremely arduous to get rid of. Instead, the same resources can be devoted to building adequate and effective infrastructure to support the digital payment system in a continuous manner so that people can make their transactions seamlessly, swiftly, reliably and cost-effectively. This, in turn, will incentivize more consumers to switch to the digital channels. Finally, let the government not involve itself in pricing the digital products and services which should preferably be left to the individual banks or service providers. Rather, the Budget should try to invest in enhancing the financial and/or digital literacy.

In nutshell, we expect the Budget to be pragmatic enough to take on both the global and local challenges. The Budget should eschew too much of short-termism and chart out a trajectory for sustained growth with increased equity and enhanced standard of living for a healthy and educated society. Since it is the taxpayers who ‘run’ a government elected by the ‘voters’, every Budget should do its best to comfort and respect the taxpayers.