No room to manoeuvre: Nirmala in a tight spot

Tomorrow, finance minister Nirmala Sitharaman would present her second Union Budget. In normal circumstances, it would be a great honour to be in a position to influence the lives of 130 crore Indians. However, thanks to a deadly cocktail of the Narendra Modi government’s policy mistakes and non-conducive global factors, Ms Sitharaman finds herself in the most unenviable situation that finance ministers could have ever found themselves in. As the finance minister in early 1990s, Dr Manmohan Singh might have handled a bigger crisis and steered a tottering economy away from turbulent waters. But he did not have the burden of creating a miracle. Ms Sitharaman, however, has no such luxury.

Expectations from the Union Budget are almost infinite. Taxpayers want to pay less tax, the poor want higher spend for welfare; farmers want higher prices, but consumers are not ready for it; experts want people to save more, but companies are in no position to increase the take-home salaries of employees. Every finance minister has faced this dichotomy. But Ms Sitharaman is confronted with ever starker contradictions and has very little financial headroom to manoeuvre. So instead of giving little to everybody and help nobody, she must be selective in her budgetary support. If required, fiscal discipline could be eased for investing in assets that could boost the economy and provide a long-term value for the future generations. Infrastructure and construction are the two sectors that boost demand for multiple others.

In the infrastructure sector, the government could speed up the work on the dedicated freight corridor project. A higher investment in this project would boost the infrastructure sector and also create an alternative to road freight, which is dependent on imported fossil fuels. The construction sector could be revived merely by increasing the loan tenure for houses bought in satellite townships. A longer tenure would reduce EMI, thereby making more people eligible to buy a house, and restricting such loans to houses in satellite townships would decongest the core cities.

Similarly, the government could allow gram panchayats to set up corporate entities with all villagers being shareholders to raise debt for building basic cold storage facilities and setting up food processing units for the locally grown produce. While the government’s expenditure on these facilities would boost the economy now, the value-added products would instantly increase the income of farmers.

Ms Sitharaman could also boost the economy by restructuring personal income-tax slabs. She could remove all tax deductions except for buying insurance and pension products, and reduce tax slabs to two — say 20 per cent for high-earning people and 10 per cent for the rest. A lower tax rate would make tax evasion unattractive in terms of its sheer opportunity cost and a simple plain-vanilla could reduce the cost of tax compliance. And not to forget, it would boost consumption, increase demand, create jobs and revive the virtuous cycle once again.