Will Political Strength Lead to A Bold Budget?

Dr B Yerram Raju 24 June 2019

Economy & Nation

The first lady finance minister in 50 years is slated to present a budget amid great expectations in an era of political stability. But all is not hunky dory. Growth of gross domestic product (GDP) is projected by the Reserve Bank of Indi (RBI) at 7.1% for the current fiscal. Data from CEIC reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter, although business confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

Meanwhile, household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019, declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above the poverty line and subsidies should sharply decline. But the Union and several States are releasing more and more unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!

Statistics from the National Council for Applied Economic Research (NCAER ) place the middle-income population at around 153mn while the lower middle-income population stands at 446.3mn (Krishnan & Hatekar, EPW 2017). Salaried persons still constitute the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against money being squirelled away to tax havens. Hiding income is honourable and paying taxes, honestly, unwise. This situation unfolds a great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

There is a case for taxing the rich among the farmers by defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought. But a stable govermment can fight this, trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernising agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will kill two birds at one shot: achieving employment and economic growth.

The government should stop incurring public debt to save irresponsible banks with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the chairpersons. Governance improvement should be the focus and the RBI should withdraw its executives from all bank boards so that its regulatory rigour can be ensured.

Women have more courage than men when it comes to the question of saving a child from disaster. Madam Finance Minister should be able to pull it off.

*The author is an economist and risk management specialist. The views are personal.

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