Is Centre getting itself into fiscal trouble?
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Interim budget in Feb 2019, prior to the Lok Sabha elections, gave generously to farmers, low-paid unorganised workers and low-income earners. These brought in much-heralded measures such as income support for hard-working farmers often living on subsistence incomes, new contributory pensions for the uninsured, and taking the vast majority of taxpayers out of the income tax ambit. Govt still budgeted ever-rising, significant amounts for infrastructure and for social schemes, such as the nationwide rollout of free primary healthcare centres and free hospital care for the poor. Fiscal deficit was kept the same but the glide path was delayed by one year.
The 2019-20 budget in July 2019 gave generously to rectify the capital base of stressed government-owned banks and added generous growth capital to spur new bank credit. It gave guarantees to contain the risk of a meltdown in the non-bank lending corporates. There were also incentives for housing and electric vehicles. Post the budget, govt revamped the export credits with a generous Rs 50,000 crore package. It created a Rs 10,000 crore fund to sort out problems caused by errant property developers.
To deal with the economic slowdown, govt has made stupendous cuts in corporation taxes. These went beyond anything promised to industry and made India among the lowest taxed for new manufacturing companies. GST rates were trimmed for a few items.
Furthermore, there is news that Govt is looking to lower and rationalise income tax rates across the board, reduce GST tax bands and introduce the vehicle scrappage scheme!! It will also kick-start Rs 100 lakh crore spending on infrastructure over 5 years, sell-off large swathes of public sector enterprises (PSUs) and do some labour sector reforms!!
If these historic firsts are looked at whilst keeping in mind the mediocre increases in GST revenues and likely under-par results on direct taxes due to the slowdown, then the questions over govt's fiscal prudence are justified. What can the govt be thinking?
Higher revenues from below will compensate for near-term shortfalls:
1. Govt believes the economic slowdown will be transient and reverse in the current fiscal year itself.
2. RBI will give much higher dividends from this year onwards.
3. PSU sell-off will help meet current year spending commitments and benefit tax revenues in the long-term through greater competitiveness, efficiency and private investment.
4. Structural tax changes are required to ease the burden of tax admin and improve compliance.
5. Annual emigration of high-worth individuals can be slowed by lowering the top rates of tax on incomes and gains.
6. Tax model moves away from exemptions & MAT regime and makes India globally competitive on CrT.
7. CrT on new manufacturing companies is the lowest among competitors and will attract firms that are moving out of China.
8. Reforms will dramatically increase the likelihood of bringing in large-scale manufacturing, with coastal zones aimed at exports & industrial corridors aimed at domestic markets. Gigafactories are part of govt's plan to lower the price of EV, solar PV and electronics manufactured under Make-in-India.
Specific spending:
9. Generous bank capital infusion is required to change the outlook of public sector banks.
10. To push exports, more export credit will be provided at a lower overall cost to the trader. It envisages speedy GST refunds, higher export guarantee facility available to banks, and simpler & cheaper export credit to traders. Incentives would have to be WTO compliant.
11. RERA has flushed out unscrupulous property developers. The fund will help complete viable but delayed housing projects in the affordable & middle-income sizes.
12. FAME 2 took away private person's incentives on electric vehicles. They were given income tax benefits instead.
13. Vehicle scrappage scheme will see faster adoption of cleaner, fuel-efficient vehicles and scrap the older, most polluting, diesel vehicles. It should help to revive the auto sector, that contributes hugely to the total manufacturing activity and pays above-average GST.
14. CSR (corporate sector responsibility) spending can now be used for collaborative research and academic purposes. It can leverage higher overall private-sector R&D spending.
Ongoing spending:
15. Logistics infrastructure is a logjam for manufacturing and adversely affects competitiveness.
16. Health and education spending will provide jobs for graduates as these are labour-intensive sectors. They also increase labour-force productivity.
17. Clean India and drinking water missions will increase useful economic activity such as tourism, and reduce wasteful effort such as fetching water.
