Shubhashis Gangopadhyay: Consistent with fiscal prudence

The November 2016 demonetisation was supposed to have identified black money.  However, most Indians feel that that has not happened. So, everyone expected the Budget to shed light on how the budgetary policies will identify the black money that is surely still there in the economy. In particular, people expected the Budget to find new ways to collect tax from the non-compliant. And everyone felt that the way to improve compliance was to reduce direct tax rates — both corporate and personal income taxes. In addition to reducing the rate on the first taxable slab, the Budget reduces the threshold (from Rs1 crore to Rs50 lakh) on which the surcharge has to be paid. And, when it comes to corporate taxes, the Finance Minister took the first step towards keeping a promise made three years ago. This was the promise of reducing corporate tax rate to 25 per cent. For enterprises having less than Rs50 crore turnover, he reduced the tax rate to 25 per cent in the coming year. 

The minister’s reasoning for lowering the tax on the smaller enterprises is that they constitute more than 90 per cent of all enterprises and employs the largest number of people. What he did not say explicitly is that these could be the very same people who do not pay much tax on their income. The minister also pointed out that the effective tax rate (calculated from among those who pay taxes) on the smaller enterprises is close to 30 per cent while that on the larger enterprises is less than 24 per cent. If improving compliance is the goal, this is a good move even though the corporates that have been left out from this largesse are offended by this. But what about the surcharge on those with annual salaries above Rs50 lakh? Unfortunately, taxes on salaries are difficult to evade and, there are a surprisingly small number of people who report incomes between Rs50 lakh and Rs1 crore. 

And for those non-salaried individuals who earn more than Rs50 lakh, there are other and easier methods of getting them to comply. Or, at least, that is what the government seems to think.Overall, the Budget gives me hope that the thinking is consistent and not a collection of initiatives undertaken at the behest of lobbyists — whether for-profit or not-for-profit. Interest groups and their influence cannot be wished away. The best the government can do is leave its own imprint on what it thinks the Budget should achieve and that the different initiatives are not in conflict with each other. For instance, this Budget has maintained fiscal prudence by increasing tax collection in a year that has registered lower than expected growth rate. And, for the next year it has committed to continue with this fiscal prudence by showing an increased tax revenue even when it has increased expenditure on infrastructure and public capital. It has stayed away from giving graded sops to various sectors. 

If I am to find anything that is not well-thought out in this Budget, it is this obsession on doubling farmer incomes without a blue-print for taking people out of agriculture. Agriculture investments may improve productivity but it will also reduce farm incomes. Why? All studies show that demand for agricultural produce is inelastic, i.e., any increase in supply of food will reduce prices so much that the total revenue earned by farmers will go down. And overall growth does not help because amounts spent on agricultural produce do not change that much with income. More specific thought has to be given to help the rural youth to look for opportunities outside of agriculture. A much faster pace of urbanisation is the key.

The writer is research director at  IDF