Governments are “lame ducks” in the last quarter preceding a general election. The future might not be theirs and self-assessment of achievements needs independent triangulation. So, caveat emptor prevails on both counts.
New taxes and new expenditure are “haram” in a vote on account, which should only seek legislative approval for continuing to collect taxes and spend public resources beyond the fiscal yearend, awaiting a new government following the elections.
The BJP has a majority in the Lok Sabha. Anything that it proposes will be voted in, even if the Rajya Sabha turns it down. Even the President can only return a Finance Bill once. But the Lok Sabha has the final say. Possibly this is what restrained then President Pranab Mukherjee from returning the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Bill 2016, which was unconventionally classified as a “money bill” by the Speaker of the Lok Sabha. A worthy cause — Aadhaar — was thereby legislated. But the door for unconventional action had opened wider.
Will the BJP walk through this door on February 1 and present a full Budget? It would be unwise and is unlikely. Rushing through a full Budget, just prior to the elections, would make it seem like a last hurrah before defeat. Departing from convention in the public interest (Aadhaar) is one thing. Doing so in self-interest is quite another.
In any event, there is not much relief that can be expected on the tax front. Gross tax to GDP ratio increased marginally, under the Narendra Modi government, to 10.8 per cent of GDP. But the 12 per cent of GDP achieved during 2007-08 under UPA-1 remains an elusive target. Revenue from customs is on a near-irreversible long-term decline. If India is to be a manufacturing and export hub, there is no future in import duties as a buoyant revenue source. The revenue from the Central Goods and Services Tax remains significantly below the target of `6 trillion. Corporate tax revenue will be hit by low bottomlines. Income tax revenue is the only bright spot, growing at 16 per cent till December.
The fiscal deficit is under pressure from the need to recapitalise public sector banks and mitigate the hardship from agrarian distress and the loss of jobs. The target of 3.3 per cent will be achieved after some creative accounting — the CAG report 32 of December 2017, compliance audit under the Fiscal Responsibility and Budget Management Act 2003 for the 2015-16 financial accounts highlighted the need to plug accounting norms and gaps which encourage misclassification of expenditure; building up current liabilities to keep the deficit low and unconventional use of off-Budget transfers between publicly-owned enterprises to reduce expenditure or inflate revenue. Some of this is not new. Such fudging has been going on since 2005-06 and some gaming is inevitable, but it must not exceed limits.
The leaked data from the supressed NSSO periodic labour survey 2017-18 corroborates the Centre for Monitoring Indian Economy assessment that a million jobs (net) were lost in 2018. Creating them back seems tough in the strained global environment for 2019, with China growing slower than India and trade disruptions galore. The next government will need to prioritise putting incomes directly in the hands of the bottom 60 per cent. Along with small farmers, all small “entrepreneurs” in the informal sector and workers are distressed. Increasing tax revenue by at least two percentage points to 13 per cent of GDP is the only sustainable way to fund direct transfers for income security. Loan waivers are an inferior option since it hits the viability of public sector banks.
The bottom line, sadly, is that finance minister Arun Jaitley’s FY 2015-16 promise of reducing corporate tax to 25 per cent will remain unfulfilled for the 7,000 (top 10 per cent) corporate tax payers. The remaining 90 per cent already enjoy lower tax from FY 2018.
Income-tax revenue growth outpaced corporate tax growth till December this fiscal year. This bolstered the tax effort against faltering Goods and Services Tax revenue, which is cumulatively in deficit against the target of `6 trillion (Central GST).
A generic statement to make expenditure policy medium term-oriented and narrowly focused on the core mandate of the Union government would be desirable. Admittedly, this is tough with tax revenues perpetually under-performing. But minus institutional mechanisms to force a medium-term orientation, we are left at the mercy of incoming governments to carry on the good work done earlier. Consider the future of Ayushman Bharat if the BJP is not re-elected. An incredibly powerful scheme to pull-in private investment into the health infrastructure and services whilst insuring the poor for free against hospitalisation expenses could wither away.
In 2014, the Narendra Modi government rejigged central planning and fiscal allocation mechanisms and rationalised centrally-sponsored schemes pancaked over years. But national schemes have proliferated — many outside the core mandate of the Union government to areas of a shared mandate with the states.
The Fifteenth Finance Commission — whose report is expected later this year — might empower the states further by increasing their share beyond the existing 43 per cent in the divisible pool of resources. The Union government must brace for this eventuality and change its work ethic — substitute persuasion for brute fiscal power; use collaboration rather than top-down directives and joint branding of national schemes for getting a political buy-in from regional political parties.
Two additional national councils like the GST Council — one for infrastructure and the other for human and social development — can create an institutional framework for expanding cooperative federalism: in roads, electric power, water, agriculture, markets, health, education and social protection.
The GST Council could be expanded into a Fiscal Council with a broader mandate. This might facilitate expanding the GST coverage to liquor and petro products (currently state taxes). In exchange, the Union government could agree to a rearrangement of the fiscal deficit targets from 3:3 to 2:4 (Union: states) to give states additional fiscal headroom.
The Interim Budget can, at best, announce good intentions. Let these, at least, be high-minded, and forward-looking ones....