What the Union Budget can do to reignite the engines of the economy
The excitement ahead of this year’s Budget is like that of the last over of a T20 game, where the batting side need 20 runs and they have only one wicket in hand. The batting side in this game is the Indian government. It needs a lot of firepower to win the game, but is short of resources.
It is now well-established that the global economy is looking to be in the doldrums for the next three-four years; amidst this gloom and doom, India has the ambitious GDP (gross domestic product) growth target of 7.5-8 per cent. This, despite the new GDP calculation method, looks like a difficult task, given the way other major global economies are collapsing — China is likely to grow at 6.3 per cent, and the world GDP to grow at 3.4 per cent.
Can the government maintain even the current GDP growth rate of 7.3-7.5 per cent in the next couple of years? Do they have enough firepower to revive the economy? What can the Budget do to reignite the engines of the economy?
BUDGET FOR GROWTH
Ahead of the Budget, the government is in a dilemma — should it go for a massive infrastructure push, which many think is a must, given the low capital expenditure (capex) from private sector, or should it try to stick to the fiscal deficit target of 3.5 per cent in 2016-17?
In the current financial year, the government can manage to achieve its tight fiscal deficit target — thanks to a sharp fall in crude oil prices that helped the government save 42 per cent in oil imports (in dollar term) in the first nine month of the 2015-16. The government also benefitted from a 35 per cent jump in indirect tax collection due to increased excise duty on petroleum products and an increase in service tax from 12.5 per cent to 14 per cent.
But going forward, these factors may not be in favour of the government. Oil prices would not see such a sharp fall in the future, and it is unlikely that the government would increase the excise duty this year to move close to the proposed goods and services tax (GST) rate of 18 per cent, given the fact that the domestic industry is in a poor shape.
Can it then afford to set aside the fiscal deficit target of 3.5 per cent, and instead give a higher allocation to capital expenditure — which has for long remained below 2 per cent of the GDP? Not sticking to the fiscal deficit target has its own risk — the biggest being no immediate (sovereign) rating upgrade. But given that the need of the hour is massive infrastructure spending to give boost a sagging economy, the government must, for now, let the fiscal target slip a bit in favour of triggering growth.
This may also mean that the allocation to some of the social sectors may have to be rationalised and prioritized — agriculture and rural sector problems need urgent redressal and, therefore, the Budget must have special provisions for the two sectors. Low rural demand has been one of the major concerns of the government, and if it can — through higher allocation to programmes such as MNREGS, and so on.
TAX REFORMS
While the fate of GST remains in the hands of the politics of the land, the government can push some direct tax reforms in the Budget.
It should take the first step towards rationalising the corporate tax by reducing it by at least 2 percentage points, from 30 per cent to 28 per cent. This would pave the way for withdrawing some of the corporate tax exemptions. Indian government lost Rs 62,000 crore in 201415 due to these exemptions.
The minimum alternate tax (MAT) — a tax levied on book profits of usually zero or very low-tax companies — remains a sore in the eye of corporates, who believe there is no point paying a high MAT of 18.5 per cent, when the effective tax rate for many companies are as low as 20 per cent. While some industry bodies such as the Assocham and CII have called for removal of MAT, there are others who feel the rate should be brought down from 18.5 per cent, to 10-15 per cent. The removal of MAT looks unlikely, but the government can certainly reduce the rate to at least 15 per cent.
The unprecedented drop in commodity prices globally has shaken the domestic miners and steel manufacturers. The government must be under enormous pressure from such companies to levy higher import duty on cheaper imports to protect their (domestic manufacturers) interest. The government would do well to stir itself clear of such moves of protectionism.
Last year in September, the government set up a panel to propose changes in the provisions of Income Tax Act so as to make its language less ambivalent so as to reduce tax litigations and improve ease of doing business. The panel has given its first set of recommendations. The government must use the Budget to announce that it is going to implement the recommendations of the panel. This would send a positive signal to the business community and go on to establish that the government means business.
The Budget should also try to implement the recommendations of Tax Administration Reform Commission (TARC). The recommendations, if implemented, can have far-reaching impact on the way tax authorities work in the country. Indian tax authorities have earned not-so-pleasant sobriquet of tax extortionists, and the TARC recommendations, if implemented, are set to change this perception.
RELIEF TO COMMON MAN
On the personal taxation front, the government last year made several announcements including increasing the basic exemption limit, Section 80C and 80D limits. However, this year also it should make some more announcements to give relief to the common man. Remember, they are the people who drive consumption growth.
The government can further increase the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh for all classes of tax payers. It should also increase the deduction limit on home loan interest payment from Rs 2 lakh to Rs 3 lakh a year.
The government should also take the initiative to link the highest personal tax rate with that of corporate tax rate. So, if the government decides to cut the corporate tax rate to 28 per cent, it should also bring down the highest personal tax rate to 28 per cent. This would be a big sentiment booster.
Now, it is to be seen if the government has enough elbowroom to push infrastructure spending and also manage to keep the fiscal deficit going out of hands. The government sure has a difficult task ahead, and curtains on how it manages to handle this situation would be lifted with the Budget.