Given geopolitical uncertainties, inflation and slowing global growth, one hopes the FM walks a mid-path
By Dr Seela Subba Rao
Over the last three years, the Centre had announced a slew of significant economic reforms which had bolstered the engines of growth. There are a lot of expectations from the upcoming Budget from different sections — industrialists, taxpayers, educationists, technocrats, etc.
This union Budget will be presented against the backdrop of geopolitical uncertainties, high inflation and slowing global growth. Enhancement of domestic sources of growth would be crucial to maintaining a steady trajectory. Measures such as reduction in the cost of capital, power tariff, logistics, land and labour would be most welcome. At the same time, appropriate steps to grow employment, capacity utilisation and social infrastructure too are paramount.
Tools and Objectives
It is pertinent to mention the tools of fiscal policy and its implications. Fiscal policy is the guiding force that helps government decide how much money it should spend to support economic activities and how much money it must earn from the system to keep the wheels of the economy moving smoothly. Major instruments of fiscal policy include taxation, public expenditure, public debt, fiscal deficit, investment avenues and disinvestment policies. The fiscal policy can be classified either as expansionary or contractionary. An expansionary fiscal policy is used at times of economic slump whereas a contractionary policy is announced at lowering inflation as it tends to reduce the quantum of money by raising taxes and reducing spending.
Fiscal policy should be in tune with the revival of economic growth and fiscal deficit should be within the prescribed limit. The broad objectives of an ideal fiscal policy are:
• To mobilise adequate resources for financing various programmes adopted by the government for economic growth through taxation, public and private savings, etc
• Must be judiciously designed to increase the rate of capital formation. Incentives should be introduced to enhance the rate of savings and investment
• Incentives should be offered by government for setting up projects in backward areas to reduce regional disparities
• It is also important to reduce the degree of inequality in distribution of income and wealth
• To control inflation and stabilise price. This can be achieved through reducing tax savings schemes, etc.
• Poverty alleviation and creation of employment opportunities is another key objective
• A sizeable portion of government’s revenue is to be invested in the development of infrastructure
In view of the current fiscal situation and high inflation, the Centre may not go for populist schemes in this Budget. Rather, fiscal consolidation will be given thrust because, by 2024-25, we need to reach the fiscal deficit target of 4.5% of the GDP. Inflation is another area of concern. Hence, it should not come as a surprise if there is no announcement of huge cash transfers to the hands of the people. There could, however, be targeted cash transfers.
A Budget is more like an income and expenditure statement of the government. If one analyses the proportion of revenue expenditure to the total expenditure in the past few years, the quantum of revenue expenditure works out to 85-90% and capex spending by the government is minimal, ie, 10-15%. If the government is not doing anything on the taxation front, then it has to depend on the private sector heavily to push forward economic growth.
The upcoming Budget may introduce considerations for accelerating the national education framework.
If done properly, more funds can help give a fillip to the education sector. There is a need to create a conducive environment for tech startups to flourish. Suitable policy reforms on skilling and talent development can be framed and adopted since the union Budget is the right opportunity for the government.
The income tax rates have not been considered for revision since FY18. Although a new tax regime was introduced, it has not been adopted by a majority of taxpayers due to its unviability as compared with the old system. To leverage more purchasing power and provide some tax relief, the highest tax rate of 30% needs to be reduced to 25%. Further, considering the increased rates of medical treatments and medical insurance, the existing limit of Rs 25,000-50,000 under Section D of the Income Tax Act needs to be reviewed and increased to match the inflationary trend.
The government had provided a concessional/alternate tax system for domestic companies, individuals, Hindu undivided families (HUF) and cooperative societies. But partnership firms and limited liability partnership (LLP) are taxable at a flat rate of 30%. It may consider introducing corresponding concessional tax regimes for partnerships and LLPs. Currently, the capital gains tax regime is too complex with varying tax rates, differences in treatment based on holding period, etc. Rationaliaing capital gains tax will ensure uniformity as well as simplicity.
There is also a need to provide further incentives for exports to bring the trade/current account deficit under control. Trading in rupee with other countries instead of the dollar may be encouraged. Removal of double tax on buyback through the open market is one of the areas which would facilitate the ease of doing business.
The government may take cognizance of the importance of kisan drones, chemical-free natural farming and supporting the delivery of digital & high-tech services to farmers across the country. Early startups and SMEs in the agrarian sector need government support in terms of tax sops to smoothen their business operations.
The industry is seeing stagnant growth amid global challenges. Under such circumstances, the government should continue with its structural reforms coupled with suitable fiscal reforms. Structural reforms may encompass new areas like the power sector, digitalisation, labour reforms and bilateral trade agreements with more countries. Let’s hope the Finance Minister chooses a mid-path – between a populist Budget and a fiscally responsible one.