A K Bhattacharya: Setting Budget priorities

Tax cuts must go hand in hand with abolition of exemptions

Just about five weeks remain before Finance Minister Arun Jaitley is due to present his fourth Budget. The circumstances under which he is framing this Budget are quite unique. Demonetisation and the new challenges in launching the goods and services tax (GST) are factors that will significantly influence Jaitley’s Budget-making exercise this time. One of the factors — demonetisation — was almost unanticipated even a couple of months ago and the other factor has cropped up after fresh political uncertainties have suddenly clouded the prospects of launching GST by April 2017. Compare this with the situation that preceded all the three previous Budgets of the Narendra Modi-led government, the challenges facing Jaitley now look different and quite daunting.

 
The challenges of reviving the economy after the adverse impact of demonetisation on the pace of economic activities will obviously be top on the finance minister’s agenda. There is no easy and quick solution to reviving economic growth in the current situation. The economy will take its own time to adjust to a new regime of reduced cash availability in a system that is still predominantly dependent on cash for a large chunk of its transactions. So, the finance minister would do well to recognise the prospects of a demonetisation-led slowdown in the economy and frame his policies keeping that factor in mind. His fiscal consolidation plans should also be tempered by definite prospects of slower growth in the nominal size of gross domestic product.

The launch of GST was earlier expected to be the centrepiece of the next Budget. Thanks to the economic and political disruption caused by demonetisation, there are now serious doubts if the finance minister would be able to stick to his original target of rolling out GST by April 2017. It would be unfortunate if the GST’s roll-out date falls victim to demonetisation and the strong political resistance it has provoked in some of those states, which were earlier votaries of the indirect taxes reform. Whatever be the challenges of demonetisation, the next Budget must do its best to revive the confidence of everyone, including investors, in the government’s commitment to roll out the new tax regime within the promised date. The productivity and efficiency gains that trade and industry would achieve through GST would more than offset the initial disruption that will be caused by the new tax.

 

Another problematic direction that the Budget must avoid is to offer populist concessions and incentives to trade, industry and ordinary people to soften the blow that demonetisation dealt to them in the last two months. There are talks within the government that the Budget will be used as an instrument for providing fiscal sops to people and companies. Jaitley must remember that he is committed to rolling out a direct taxes regime that would phase out exemptions while bringing down the tax rates. But in an environment where the government’s top leadership is in a mood to do a good turn to trade and industry already hassled by demonetisation, there will be a temptation to cut tax rates without phasing out exemptions. That must be avoided. Tax cuts must go hand in hand with tax rationalisation, including phasing out exemptions.

 
That leaves one big area that the next Budget must address — public investments. There are no signs of any revival of investments by India Inc, particularly those which operate in the infrastructure sector. The Indian industry’s capacity utilisation level continues to languish at less than 75%, raising doubts about its appetite for fresh investment. The banking sector, too, is anaemic with the burden of non-performing assets constraining its ability to lend more to the corporate sector. To fill this gap, therefore, there is a crying need for increasing public investments by a significant margin. In his third Budget, Jaitley had increased capital outlay by Rs 70,000 crore. His fourth Budget, too, should attempt another big increase in public investments.

 
The big dilemma will of course be whether more public investments should be allowed after conceding a fiscal deficit that is slightly higher than what the government had earlier indicated. A committee headed by former revenue secretary N K Singh is expected to outline a new road map for fiscal consolidation. Jaitley would do well to accept the new targets only after assuring himself that he has enough additional resources for increasing public investments. Consumption demand has already been hit by demonetisation. All efforts should be made to compensate that through higher investments.