Union Budget alone cannot shape which way the economy steers. There’s a lot more to this. For example, when the parliament enacted the bankruptcy law, The Insolvency and Bankruptcy Code 2016, it was a sure boost for both ailing banks that were demanding an uncomplicated and fast way to recover dues and corporates that are struggling due to a variety of reasons, including sectoral slowdown. In this regard, one must also note the enactment of law that frees up Jammu and Kashmir from the shackles of opportunistic politics and policy paralysis. With clampdown on terror activities and prospects for companies to start new ventures in the newest Union Territory, economic activity is set to see an upward movement, thereby delivering on expectations ranging from employment for local youth to expansion in factory output. In this light, the Union Budget that is set to be presented in less than a month by the Finance Minister shall be seen as a key event, if not a landmark one.
Expectations are huge and why not? Discussions on the upcoming budget have already become prime time news and economic experts have proposed innumerous measures. The talk of the town is a reduction in personal tax rates, higher spending by the government on education and other social sectors and abidance of fiscal prudency, a highlight of the BJP-government budget for long. That corporate tax rates have already been cut through an executive order is taking the discussion away from what corporates need from the budget of 2020. The government is set to consider a plethora of wide-ranging concerns, including a below-expectation collection of GST and inflationary forces, which have lately seen an upward trend owing to rise in food prices. With the government duly acknowledging a slowdown in economic activity in the country, one can expect that the key concerns won’t be brushed under the carpet.
What then will be the announcement? What will distinguish the upcoming budget from government’s previous endeavours and will the new one infuse positivity in the market? Although no one can precisely tell what is going through the mind of policymakers, let us find out what the expectations are and how the government can deliver on them.
Cut in personal income tax
One thing is sure, that the opposition and even the worst of the critics of the government will think twice before criticizing the finance minister for reducing personal tax rates or tweaking slabs for the benefit of taxpayers. That only a small fraction of the population pays this tax is a key point to be considered. At the same time, tax revenue from personal income tax was just shy of INR 5 lakh crore in the last fiscal year and this highlights the significance of this revenue source. In the last budget, the government went for a higher levy on super-rich and surcharge was hiked for individuals pocketing more than INR 2 crore in a year.
Now given the reduction in effective corporate tax rate from 35 percent to 25.17 percent announced in September last year, the government seems to have little elbow room for cutting personal tax rates. Since direct tax has a share of around 55 percent in total tax revenue of the government of India, and the other half made up by indirect tax is already subdued, the government cannot afford to lose revenue from personal tax. However, the government has shown figures that tell compliance has improved manifold in the recent past for personal tax and this advance in compliance can become a basis for some relaxation to taxpayers. The economy has slowed down and the GDP growth rate has come down to below-5 percent. Economists agree that the problem is not from the supply side but the demand side, which has remained weak for quite a long time. A dip in sale of passenger vehicles, along with many other events, tells that people are left with less money to spend.
This makes a perfect case for a reduction in personal tax rates. The government has already made income upto INR 5 lakh tax-free. This time, the government can cut a few percentage points from tax rates levied on income above INR 5 lakh. This relaxation can be extended to all income groups, including the super-rich who pay as high as 43 percent tax on earnings above INR 5 crore. People left with more money in their hand are likely to spend more and hence, the demand side will see a boost. This is simple economics. But the picture becomes complex when one looks at the latest inflation numbers that reflect a 7.35 percent growth in inflation in December 2019. This is no mean figure. In fact, the prices of vegetables have risen sharply and this can further dent the aspiration of the middle class to have any relaxation in tax rates.
Still, the government can rely on a better harvest of food products in the upcoming season and place its bet on lowering rates for boosting demand in the consumer products category and other important factory products. That car and two-wheeler manufacturers and their retailers are cutting jobs has highlighted the stress in the job sector. A boost in demand of these products is the only savior, which can come by giving more spending power in the hands of the middle-class populace.
Cutting government stake in public sector companies has been one area where the performance of Modi-led government has been sub-par. The one-time crown of India’s aviation sector, Air India, has been up for sale but no buyer seems to take interest, given the burden it brings that far outweighs benefits arising out of Air India’s assets. In the last year’s budget, the divestment target was around INR 1 lakh crore and with only two and a half months to go, the government is likely to miss it by a generous margin. While the cabinet committee on economic affairs gave clearance for stake sale in Bharat Petroleum (BPCL), Container Corporation (Concor) and other PSUs late last year, the realization will not likely happen in the fiscal year ending 2020. Given that the Modi-government exceeded expectations for strategic divestment in previous fiscal years, the present shortfall, coming amidst mounting pressures on the revenue side of the budget, will only exacerbate the problems.
Now that the government is ready to sell stake in above-mentioned undertakings, which may materialize in the current or next fiscal year, the target for FY2021 needs to be more ambitious than ever. And there are a variety of reasons for the same. While one argument in favour of divestment is that the government should have a lesser role in the functioning of companies, the other and in fact a more substantial one is that PSUs have been lagging behind their private sector peers on multiple counts. There is a strong case of having less PSUs and privatising many of them. The uptick in production of Balco and Hindustan Zinc only when they went into private hands can be a compelling reason why Budget 2020 can aspire to generate more revenue from stake-sale activities.
When one makes a quick comparison between public and private players in the same field, the case for PSU stake-sale becomes even stronger. JSW Steel Ltd had a four-fold jump in its output in the last decade when SAIL could only manage 7 percent growth in production. In the crude oil sector, Cairn India has been way ahead of its public sector rival ONGC; in mining, NMDC stands nowhere when compared with Vedanta’s mining arm. Coal India has been performing below-par and this has led to increase in import of coal, something that has hurt India’s trade account.
Budget 2020 can address multiple concerns with a single stroke. By setting the bar high for divestment in the next fiscal, the government can not only have a sure source of revenue to make up for the shortfall due to cut in corporate tax, the efficiency that will come by way of privatisation will see better management of these firms, and better placed companies will generate more job opportunities besides raising demand for credit to undertake expansionary activities.
Fiscal Prudence- Now or suspended
Reining in fiscal deficit is a good thing. One cannot spend more than what is earned. But this simple lesson of finance cannot hold much value when the economy of a country like India is facing downward pressures. And this is what made the British economist, John Keynes, special. Keynesian economics tells us why governments should spend more at a time when recessionary pressures have gripped the economy. Yes, India isn’t facing recession in technical terms, subdued factory output and below-expectation GDP growth can severally hurt India’s socio-economic fabric. As a developing nation, India still has a sizeable population below the poverty line. Lifting millions out of poverty has long been the electoral call of all political parties but is it possible to do so without loosening the purse strings?
India has treaded a safe and desirous path under the Modi government and has made fiscal prudence the guiding policy when it comes to preparing the union budget. But at the same time, one must note that the economy, local and global, wasn’t facing tough time as it is now. GST collections have yet to mature and since companies are holding back on private investment, thereby not allowing expected increase in direct tax collection, fiscal prudence may seem to make sense. However, it was the Keynesian model suggesting higher government spending that helped the US and European countries leave behind the economic crisis of late 2000s. Restricting government spending can have its share of drawbacks and in a country where infrastructure spending hasn’t matched the needs to this day, fiscal deficit can be a savior than a demon.
From steel industry to unemployed youth, increased government spending can lead to cheers on multiple counts. Infrastructure spending on roads and highways and ports and healthcare can fairly compensate for dull private investment. Banks are already under pressure due to non-performing assets (although credit growth has seen a spike in recent past and NPAs have gone down) and fresh lending for corporates isn’t coming in the desired quantum. Earmarking more funds for infrastructure development, even when it means pressure on fiscal deficit count, can be the most defining aspect of Budget 2020.
The economy hasn’t benefited much from the fiscal discipline resorted to by the Modi-government due to multiple reasons. Trade war between US and China has hurt India’s export sector and slowing economies across the world, from China to Germany, have meant less demand for India’s output. And unless this shrinking demand is reversed, a boost in the economy cannot be expected. Infrastructure sector of India has great appetite for investment and with government spending more money, a spike in jobs and eventual surge in public spending can be expected. The right step is to sideline the fiscal prudence thing for at least 2 to 3 fiscal years and embark on a journey of higher spending.
Special incentives to new technologies
Special Economic Zones (SEZs) were created in India to boost exports and minimize the redtape. They delivered well and states with the maximum number of SEZs – Tamil Nadu, Telangana and Maharashtra – are enjoying the financial benefits that came along. The union budget for FY2021 cannot overlook the fact that India needs to establish newer industries in order for the economic activity to see revival. Present technologies have reached their maturity and the revenues from these activities have stabilized.
Now’s the need to allow private investment in new-age tech, for example, artificial technology and non-fossil fuel driven vehicles. What was done with SEZ by allowing them duty-free imports and 100 percent tax exemption for a number of years is to be repeated with new industries that are established in areas that are set to see substantial demand in coming years. Take for example the electric vehicle industry. China is leading the way from manufacturing of lithium cells and batteries to exploration of rare earth metals. It is for a reason that China can stare the United States in the eye, without blinking. They are advancing fast on new-age tech and at the same time India has become importer of many of these coveted technologies. It wasn’t until ISRO developed the lithium-ion cell technology a few years ago that we could even make a cell powering an electric vehicle, and even today, the technology has yet to be adopted by the industry.
Union Budget 2020 can be the enabler for new-age industries. Special incentives to companies engaged in these technologies can be allowed and labour laws and other impediments can be eased. A further cut in corporate tax rate for these companies or even levying a zero-rate tax for initial 3 to 4 years can be done through Budget 2020.Indeed, this can have a toll on the revenues of the government but for companies in their infancy, these are much-needed support systems that will allow them to tap credit and generate jobs.
Budget 2020, as mentioned earlier, will be one policy action among many others that are taken throughout the year to cheer up economic activity in the country. As expected, various sectors have their own set of demands. For example, the gems and jewellery industry is looking forward to reduction in import duty on gold and realtors are eying an amendment in Section 43CA of the IT Act (penalty for lowering prices). In the banking sector, recapitalisation of public sector banks will be expected and how the finance ministry deals with the problems of the NBFC sector will be noted.
To summarize, it won’t be bad for the government to shun fiscal prudency for some time given the need to revive economic growth through infrastructure development. Personal income tax rates can be lowered marginally in order to allow the middle class to spend more, thereby addressing the demand weakness in the Indian economy. Divestment needs to be rethought as a way to generate revenue and simultaneously bring efficiency in PSUs and tax holidays must be a part of Budget 2020 for enterprises in new-age tech.
(The article “Many Aspirations and Budget 2020” published in magazine Uday India in January 18, 2020 English edition)