Not an easy task balancing concerns over the emerging economic slowdown with building an inclusive economy.
Budget-making by its very nature is a delicate art—one that requires navigating disparate situations and making tough choices among a myriad set of priorities. In India, the budget-framing by the Union holds even greater significance, given the Centre’s dominance over public resources and the expectation of it serving as a flag bearer for ushering changes in the entire nation’s public policy. Three years after the Covid-19 pandemic, Nirmala Sitharaman, the accomplished Finance Minister, now faces the critical task of not only preventing an economic slowdown but also restoring the economy’s previous momentum and ensuring it operates at full potential.
In this challenging environment, the prominent tailwinds are the improved revenue collections from direct taxes (a 12% rise over the previous year, more than the estimated), a satisfactory monsoon (in 80% of the weather zones), and the higher-than-ever likelihood of the ongoing conflicts in Ukraine and Gaza ending. The consequential likely step-up in global trade and the possibility of increased capital flows and technologies across borders, could result in elevated economic activity in India as well. Together, such “positives” would favourably impact its public revenue.
A marginal thaw in relations with China—stemming from the disengagement of troops in Ladakh etc—is unlikely to lead to a reduction in defence spending. This becomes true given Bangladesh’s growing ties with Pakistan and the potential for military collaboration between the two against India. Greater infusion of public funds in a variety of schemes to pull up the sluggish aggregate consumption and investment is both warranted and likely. Incentivizing private businesses to tide over their persisting reservations to invest in fresh capacities would have to be backed by easier access to cheaper credit and more substantive risk mitigation measures. The emphasis on promoting new technologies like AI, semiconductor manufacturing, advancements in renewables, and EVs would have to be augmented in view of the intensifying global competition. Alongside, a gradual but explicit change in policy orientation toward boosting youth employment, as well as strengthening agriculture and rural development, calls for higher State-support and better funding.
CRYSTAL GAZING INTO THE BUDGET
(a) Augmenting revenue: With consumption and investment levels warranting an upward boost, sections and sectors that can meaningfully contribute, be spared additional tax burdens. Instead of imposing higher taxes or levies, the approach needs to involve incentivizing the wealthy—who typically contribute less to domestic consumption—to reinvest in their businesses or face taxation on their aggregate wealth. This has to be accompanied by endeavours to put higher purchasing power in the hands of those who are prone to spend, but have been wilting under the eroding value of their income and savings. These include recent entrants to personal tax payers, most salaried employees, and individuals at lower end of the expanding middle-income category. Additionally, the long-standing exemption of large farmers from taxation on agricultural income warrants reconsideration. Those holding more than 10 acres of land should be brought under the tax fold unless they reinvest a substantial portion of their income beyond a defined threshold, into capital assets related to agriculture or other commercial pursuits.
To augment revenue and on equity considerations, the wealthy can be taxed at 1% on their globally-held assets, which includes stocks, real estate, and liquid assets, in aggregate exceeding Rs 100 crores valued at the end of the preceding year, unless it has been reinvested in the physical capital assets of a legitimate business. Another exemption to them and wealthy farmers could be on the portion of their wealth or income invested in government or RBI-issued bonds during the year. Last year’s alterations in the capital gain tax regime also call for a review because of the numerous operational challenges.
Though definitely called for, the various exemptions under Sec 80C may not be reviewed this year under the existing tax regime. The same norm of having to wait for the new regime may be applied to the raising of the limits of various allowances received by salaried employees and not revised since 2014. There is, however, justification in the demand to enhance the standard deduction limit currently pegged at Rs 50, 000, and raising the limit of application of the higher 20% and 30% tax slabs, while considering the surcharges only on those in the highest slab. These concessions would help lower the tax incidence and increase the effective demand for several consumer, white, and other durable goods.
Provisions regarding the allowance for reinvestment of profits and admissible depreciation rates, should be made flexible and aligned with the current pace of obsolescence in each industry. The ongoing effort to reduce the overall tax burden for R&D must continue, not just for high-tech industries but also extended to a broader range of manufacturing sectors. The level of exemption should be determined by societal -priorities, with a focus on R&D in sensitive industries, those with potential to benefit a larger portion of the population, and sectors capable of reducing import-dependence quickly.
Alongside, the rationalization of the GST regime introduced in 2017 be expedited, though the actual action lies within the Inter-State GST Council. States seem to be growing accustomed to higher revenue flows from the single-point collection system. Their pro-status quo stance often emerges during council- deliberations, even when the goods under consideration would lower the tax burden on the poor and middle classes. Inclusion of petroleum and its products in the GST regime should augment their revenues and make them more amenable to exempting or lowering the tax on essentials, generally needed by the poor.
(b) Varying the development orientation through improved outlays: A high level of committed expenditure on debt service, defence, ongoing projects, transfers to states, salaries, and pensions takes away almost three-quarters of the central budget. In the last full budget, it was as high as 80% of the Rs 48 lakh crore outlay. The room available to an FM to meaningfully provide for new measures remains limited, often leading them to rely on potential savings from schemes already under implementation. Outright reductions in revenue expenditure are rare, although last year, there was a notable decline to 15% of the overall budget size.
An increased focus on rural development and agriculture backed by higher outlays and actual defraying of expenditure is certainly required. The New Year’s Day this year had begun with the Union Cabinet announcing a few increases in provisions for previously announced farm-related schemes, and a couple of new initiatives. However, the gradual approach needs to be replaced by assured budgetary provisions, enabling the leverage of higher institutional funding from NABARD, state cooperative land cum agriculture banks, and commercial banks. To incentivize financial institutions, RBI would need to relax its lending- stipulations. The recently elevated cash-credit ratio may be determined by excluding short-term loans extended to all farmers and the small loans of up to Rs 2 lakh. Additionally, land collateral should be considered adequate for such petty borrowings.
A fuller provision for MNREGA is required to boost the purchasing power in rural areas and to relieve the periodical farm distress. The Centre can encourage states to implement the assured job guarantee scheme by fully funding it in the Budget itself rather than through the latter supplementations, as the Scheme is the only one serving to safeguard against potential starvation for around 140 million farm labourers and their families. Only then it would be amenable to proceed ahead in the spirit it was conceived, viz., a justiciable right. The failure of district authorities to provide guaranteed jobs within the prescribed time limit and distance must be met with penalties, ensuring that it does not remain a worthless promise. The forthcoming Budget could be an opportunity to launch a pilot Urban Employment Scheme in select cities across each state, though without including the guarantee aspect in the initial stages.
Given the array of considerations, reinforced by the persistent and varied manifestations of climate change this year, the Budget must reflect the government’s commitment to mitigating its impact. Reports suggest that the country loses 2% to 3% of its GDP annually due to climate-change-induced disasters, with an estimated Rs 15 lakh crore required annually to achieve Net Zero by 2070. The failure to adequately decentralize the growth process, leading to an increasingly city-oriented approach, has contributed to many of the accentuating challenges, including rising temperatures, forest fires, floods, and cyclones.
Economic activities capable of being relocated away from urban agglomerations—such as common manufacturing, power stations, refineries, and chemical plants, along with their expansions—should certainly be shifted to rural settings and small towns, away from cities. Agro-processing and logistics could logically be the prime mover spearheading the process of “ru-urbanization.” The Shyama Prasad Mukherjee R-urban Mission, launched in 2015 to transform 300 village clusters into modern townships with advanced medical, educational, and other services, requires further development and consistent funding. To regulate migration and the inevitable congestion and slum-settlements seen in cities like Shanghai, which bore the brunt of the unprecedented growth in the 1990s and 2000s, China had successfully implemented its “Leave Agriculture but Stay in Villages” program. With jobs and several of the basic modern amenities becoming available nearer home, the attraction of the bright lights of the cities, suo motto, lessens.
In such a rural-focused development orientation, augmenting rural facilities for basic healthcare and school-level education, ensuring they meet the same standards as those in towns and cities, is imperative. Again, like rural development and agriculture, both these fall under the responsibility of provincial governments. However, without significantly increased financial assistance, meaningful progress will remain tardy. Support in designing the process for a useful universal rural school education and basic healthcare, exposing local practitioners to global best practices, and facilitating access to multilateral and bilateral development aid must be vastly improved. The benefits to the entire ecosystem, stemming from the resultant higher productivity, cannot be overemphasized.
(c) Improving fiscal management: With lower-than-budgeted expenditure on infrastructure, the Union government is likely to remain within the upper limit for the current fiscal deficit, around 4.3% of GDP. However, it may not have such comfort next year, as the Union government leads the capital formation process until private investors are assured about the sustainability of the newly created demand. The tweaked orientation in favour of rural areas, agriculture, employment generation, and tax concessions for the lower middle class will undoubtedly impact finances. Some mitigation through expected additional revenues from new tax measures should come in handy. A deficit of around 5% in an environment of elevated growth, resulting in a higher supply of goods and services, can be manageable without raising the apprehension of inflation. Permitting the States higher open market borrowings could help contain the overall fiscal deficit.
The Centre must remain acutely aware that national prosperity is the sum total of progress achieved by the states. To drive a recovery in the country’s economic growth, the Centre has to continuously support and facilitate states in advancing their chosen models of development. A persistent constraint has been the inadequacy of financial resources. In this regard, the periodically established Finance Commissions must fulfil their duties in favour of both the Centre and the states. More than ever before, there is need to better incentivize states to use their funds efficiently, distinguishing those that do from those that do not. For too long, this constitutional mechanism has been hampered by considerations of equity, with about 80% of devolution linked to need and not performance. The establishment of a statutory Inter-State Fiscal Management Council, similar in structure to the GST Council, must be expedited. It would enhance states’ confidence by involving them in monitoring of fiscal deficits, inflation management, supply chains, and broader development planning. The Council’s necessity has grown since the disbandment of the previous Planning Commission.
* Dr Ajay Dua, an ex-Union Secretary, Commerce & Industry, is a development economist by training.