Introduction
The forthcoming
budget is expected by some to be ‘make or break’ or ‘path breaking’ , by others to provide a legislative
or economic road map for the remaining term of the Govt. Most likely it will focus on issues under the
purview of finance ministry, namely macro management, taxation, expenditure,
financial sector and Balance of Payments.
Federalism
The abolition of the Planning Commission and Finance Commission
recommendations on tax devolution, together makes it possible for this budget to
initiate a structural movement back to the principles of Federalism embedded in
the constitution and its Central, State and concurrent lists. Though the
Concurrent list gives overall policy responsibility to the Central government
for many sectors, the administrative responsibilities have been fairly well
defined. Thus the States are responsible
for the basic Health, Education, Social Welfare (poverty) and Security (police)
of the general population.
The Finance Commission recommendations to increase
non-discretionary tax devolution by 10% points to 42% from 32%. This
calculation accounts for the actual & potential revenue receipts and
expenditures of the States on all sectors that are the administrative &
financial responsibility of the States. This effectively means that instead of
an extra 10% being channeled through the Central Govt and the (erstwhile)
Planning commission into Centrally Sponsored Schemes (CSS) on Health,
Education, Social Welfare, these funds will go as untied funds to States to
allocate in the manner that they feel is most appropriate for their State. The
budget will inform us how quickly the old schemes in these sectors are to be
phased out or abolished. This is the essence of Federalism: Financial funds,
allocation rights and administrative
responsibilities must be located in the same level of Govt., whether it
is the Center, State or Local Govt..
The fiscal recommendations of the Finance Commission, a constitutional
body, has removed some of the uncertainty
about government’s fiscal stance. The government now has clear backing to ignore
demands for a fiscal stimulus beyond earlier targets of 3.6% in 2015-16 and 3%
in 2016-17. It can also focus more strongly on reducing the Revenue deficit (RD),
something I have argued for years. The RD mirrors the net dis-saving of the
Central Govt. A reduction in the RD is therefore critical to raising the
National saving rate. This in turn is linked to India’s net international asset
position (NIA), stability of capital flows and the international credit rating
of the country. The budget is expected to spell out its approach to Fiscal
responsibility legislation and possibly to raising India’s credit rating over a
decade.
Growth Imperative
The Growth rate of the Indian economy has accelerated by about 0.9% point in 20014-15 (compared to
2013-4). This is accompanied by (or partly due to) an acceleration in growth
rate of private consumption growth and gross fixed capital formation. However, available indicators also show that
the growth of demand for the corporate sector is weak. In the case of Automobiles, housing & other consumer durables, high real interest
are an important contributor. A clear and credible fiscal consolidation path
will make it imperative for the Central Bank to reduce high nominal policy
rates that are partly responsible for choking consumer demand.
Expenditure Priorities
The budget is also expected to lay out a clearer approach to and road
map of the Government’s new flagship programs, namely Jan Dhan Yojna, Sagar
Mala, 100 cities, Digital India/e governance, e-health/education, Make in
India, Skilling India, Swach Bharat(S) and Beti Bachao-Beti Padhao. The move from price
distorting subsidies to direct transfers to deserving poor will gather steam
and help reduce corruption & admin costs. The consequent fiscal space will
be used to increase spending on public goods infrastructure that can attract
complimentary job creating private investment.
Eliminating Tax Terrorism
Tax administration and appellate
procedures, their speed and effectiveness, are known to be an important focus
of the Govt., since the BJP manifesto used the word “tax terrorism”. Both
domestic and foreign tax payers are looking for more concrete measures to
further these objectives and end the anti-deluvian practices of the tax administration
and their replacement by a more modern, accounts based customer focused
approach. Business is also looking forward to Initial steps towards GST
implementation, a clear statement on the simplification of Income taxes and the
Direct taxes code. I am also hopeful the
interrupted journey to a simple, uniform customs duty structure will resume.
For instance the elimination of dozens of specific duties on textile products
is overdue. Some steps towards rationalization of Agricultural import &
export duties would also be welcome.
Minor Tax Sops vs Simplification
An interesting question is the extent to
which, government will go back to the pre-1990s practice of using deductions
& exemptions to stimulate demand for or investment in, certain sectors like
defense, electronics, real estate and automobiles. I expect it to follow a middle path of some
simplification coupled with modest incentives, which many budgets since 1991
have done. An increase in the housing (interest) deduction in the personal
income tax can probably be justified on grounds of inflation adjustment and is
likely to occur. Electronics suffers from an inverted customs duty structure
because we bound ourselves to an IT0 agreement that eliminated tariffs on many
final goods, but not on imported inputs. Tax incentive may be used for
incentivizing job creation and employment opportunities in labor intensive
sectors like tourism
Financial Reforms
As financial and external sectors come
directly within the purview of the Finance ministry, I would expect the budget
to address the legacy problems of the Public Sector Banks, such as the NPA’s
incurred by them due to Govt. forced lending by PSBs to unviable infrastructure
projects. These projects were recognized by private banks to have excessive
policy and regulatory risks to be viable for debt financing. On the positive side one expects new policy
and institutional reform initiatives relating to the financial and external
sectors. For instance the stalled proposal for creating a global financial
center in India, is likely to be revived in a new form. Similarly, some reduction of controls on the
external/BOP account can also be expected.
Conclusion
Overall I expect the budget to
give us a sense of the Govt’s approach to fiscal and financial policy and to
give an indication of economic reforms to accelerate and sustain the growth of
the economy, jobs and employment opportunities.
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A version of this article
appeared on the Op Ed page of the Indian Express on August 28, 2015 under the
banner, “No Clean Slate.” http://indianexpress.com/article/opinion/columns/no-clean-slate-2/
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