Statsguru: Budget expectations

FM might also refer transitioning to a universal basic income (UBI) architecture in his Budget

By all accounts, growth has slowed after demonetisation. But while some analysts expect it to bounce back quickly after full remonetisation, others aren’t so sure. 

It is what the government believes that will determine whether Finance Minister Arun Jaitley deviates from the path of fiscal consolidation or stays on track. As Chart 1 shows, governments tend to loosen the purse strings when growth falters. 

It is hoped that demonetisation, coupled with the implementation of the goods and service tax (GST), will widen the tax base. As Chart 2 shows, India has one of the lowest tax-to-GDP ratios in the world, which has  shown no signs of increasing over the past decade — as shown in Chart 3. 

It is expected that to assuage the people’s suffering on account of demonetisation, the finance minister will announce tax breaks in this Budget. Currently, as shown in Chart 4, India has one of the highest corporate tax rates in the world. Although when adjusted for exemptions, it is much lower, as shown in Chart 5. Perhaps, the earlier proposal to whittle down exemptions and lower the tax rate will now be implemented. Any lowering of personal tax rates will also increase compliance. 

The finance minister might also refer transitioning to a universal basic income (UBI) architecture in his Budget. 

The Economic Survey is expected to devote a chapter on this. But subsidies already account for 4.2 per cent of GDP and it is difficult to see how the government will fund UBI without cutting the existing subsidies. It could use the socio-economic caste census to ensure efficient targeting, thereby reducing the subsidies that flow to the rich, as seen in Chart 7.