Axe may fall on waste, subsidies
Narendra Modi’s first Budget has the tough task of containing fiscal deficit, reviving economic growth and curbing inflation. While it will be a tough task to change the business environment, cut red tape and facilitate ease of doing business, some steps in this direction would actually be welcome. The Budget will need to find resources and facilitate investment in agriculture, energy, manufacturing and infrastructure, all of which are crucial for growth, employment and inflation control.
The actions to achieve these goals will involve some tough decisions in the short-term that will pave the way for sustained long-term growth. However, in my view, we are not likely to see hike in tax rates to raise revenue. For one, the Goods and Services Tax (GST) and Direct Taxes Code (DTC) are close to being finalised and their introduction will lead to revenue gains for the government and substantial relief for taxpayers. There is a strong case for streamlining tax administration and widening the tax net.
The Indian economy has doubled in the last seven years to $2 trillion, per capita incomes have risen sharply and India now has the largest number of billionaires in Asia (except Japan). Yet, only 3 per cent of Indians pay income-tax and the tax to gross domestic product ratio has risen only marginally, from 10.49 per cent in 1979-80 to 11.07 per cent in 2013-14.
There are other options to increase revenue like cutting expenditure, increasing productivity and finding innovative ways to access funds. Given the large fiscal deficit, tax concessions and exemptions are likely to be minimal, though the Budget will be tough on sloth and wastefulness. Around 40 per cent of the tax collected is spent on subsidies, which could have otherwise been ploughed into investment. So there could be attempts to bring down the subsidy on fuel (Rs 60,000 crore) by cutting the subsidy on LPG.
Inefficiencies in fertiliser subsidy (Rs 68,000 crore) could be reduced by targeting these towards poor farmers, while a revised policy could be worked out in line with gas pricing.
In a drought year it may not be possible to reduce the subsidy on food (Rs 125,000 lakh crore), though efficiencies in food procurement, storage and transportation remain on the table.
The finance minister could also synergise various overlapping schemes often aimed at the same segment, which will remove inefficiencies and cut wasteful expenditure.
Unlike in previous years, the plan expenditure of around Rs 5.5 lakh crore is not likely to be cut to meet the fiscal target and, in fact, this could be raised as the finance minister tries to kick-start investment and revive the economy.
The most important step, in my view, will be reviving disinvestment — this will not only help fill the hole in the fisc, but will revive the primary market, get the retail investor back into the market and channel household savings away from gold and real estate and into financial savings.
Dr Brinda Jagirdar is an independent consulting economist
Get ready to make some sacrifices
The Union Budget is being presented under fairly challenging times with low growth and inflation being the overriding concerns. At the same time, expectations are high as investors are looking for positive clues from the finance minister in terms of positive thrust for industry. The compulsion of adhering to Fiscal Responsibility and Budget Management remains, and there could be legacy issues of excessive rollovers of expenditures marked for this financial year to the next.
Under these circumstances, the finance minister has to play the tough guy; and there is little room for providing relief. Every measure has to be necessarily calibrated to an objective, and there is limited scope for populism. The tough call is on how to contain expenditure within the budgeted numbers without compromising the capex (capital expenditure) which is critical for providing a direct impetus to the economy. The subsidy bill is the irksome one — it entails Rs 2.56 lakh crore and has to be reviewed.
The crude oil price has gone up since the Interim Budget, while news of a sub-normal monsoon puts pressure on food prices. Therefore, there is a clear-cut tradeoff between inflation and subsidy curtailment. In fact, when the government came to power, the expectation was that this bill could be pruned. But now with inflationary pressures building up, any rollback will be difficult. But not increasing it will mean higher inflation for the public. One may expect some inflation pain on the fuel side for certain.
With these pressures on, it may also not be possible for the government to take on any additional subsidy burden on the distribution of food items due to shortages. Hence, while there has been talk of inflation control, direct intervention is unlikely and at best the onus can be passed on to the states and administrative measures like coming down on hoarding rather than any direct measures.
Tax rates are sort of bound by the Direct Taxes Code (DTC) and Goods and Services Tax (GST) and, hence, the Budget is unlikely to provide space here. Any roadmap for GST implementation would at best be placatory. While there could be some tinkering with excise and customs rates, just like what was announced for the auto segment last time, there can be no big push here given this limitation. At the individual level, the best hope is for an increase in tax exemption on savings above Rs 1 lakh level, which will be more to increase financial savings.
The government on its part may find it difficult to cut down expenditure on employment programmes considering that an adverse monsoon will make recourse to the National Rural Employment Guarantee Act programme more critical for farmers this time. This would be the tough part for the government where it will have to live with this number and at best could restructure the programme. Hence, the tone will be hawkish in general with a thrust on revival of economy.
Madan Sabnavis is chief economist, CARE Ratings
