Steady budgeting, over to Modi now PDF Print E-mail
Sunday, 02 February 2020 00:00
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Cleaning taxes & not pump-priming much good; fixing investment-climate PM’s job

If the tax charter ensures taxman can be sued for harassment, this will be a reform of the type India hasn’t seen so far


Judging the Budget by the 1,000-point fall in the Sensex is unfair considering this was influenced by the Dow falling 600 points due to fears of the Corona virus. That said, markets were looking for a large fiscal stimulus to push the collapsing economic growth; FY21’s proposed 12.7% expenditure hike is higher than FY20’s 11.7% but it may just get compressed since many revenue assumptions in the budget, from the tax ones to the disinvestment ones, look ambitious.

Higher spending was a bad idea since, with the centre-state fiscal deficit higher than household financial savings, this would just push the yields further, and curb the little private investment that is taking place.

The decision to cut personal income taxes is a welcome one since the top rate kicked in too early at Rs 10 lakh. As in the case of corporate taxes, the cuts are available only to those who don’t avail benefits like those under 80C. Cleaning the tax quagmire is welcome, but the rates need to be cut more since, in many cases, the tax payable is higher than what people pay today! The bureaucracy – in this case, the tax one – thwarting government intention is a recurring theme in the budget, as in most government policy. Changes in NRI-taxation, similarly, are welcome given how this is widely abused, but the provisions that allows taxing of the global income of Indian citizens in tax-free jurisdictions like Dubai – this is subject to tax treaty provisions though – do seem an overstretch.

A tax charter that gives the taxpayer more rights is a good idea, but without the details it is not clear if this is revolutionary. Theoretically, if the taxman harasses a taxpayer by demanding more taxes, a charter should ensure the taxman pays a financial penalty as well. Ideally, the tax board should be evaluating tax notices to see if they are arbitrary and penalizing the taxman anyway. Sadly, despite years of talking of a non-adversarial tax regime, the government has done precious little so far. The tax on startups, for instance, remains a problem even after the budget since the new provisions apply to a tiny number of firms and the angel tax, experts say, remains a ticking time bomb. Another example of tax policy remaining convoluted.

Has the budget done enough to make the economy pick up? No budget, unless there are sweeping reforms of the 1991 kind, can revive the economy; this one is no different. Telecom investors, who have invested lakhs of crore rupees have reason to be angry due to bad policy, favouring of RJio and now the AGR case; but this has little to do with the budget, it is solely in the domain of the telecom minister or the prime minister. If oilcos don’t invest more after today, this is because the rules under which they operate continue to be unfriendly and the levies too high; once again, this is the PM’s call.

The FM repeated the wildly optimistic Rs 100 lakh crore infrastructure plan; a fourth of this is to be made in the power sector where, in the absence of reforms, State Electricity Boards are too bankrupt to pay – they owe power producers more than Rs 100,000 crore already – so there is little question of investments coming in till this is fixed; whether the PM can deliver remains to be seen, more so since the first such reform plan (Uday) failed. If the budget is to be judged as a bad one since it did little to fix these issues, then this is definitely a missed opportunity. Indeed, as the Survey showed, while India’s ranking on the Ease Of Doing Business has risen a lot, the actual ease of doing business remains poor.

As in previous budgets, this one is long on talk and short on specifics. After the FM listed so many farmer-schemes, it turns out that while the FY21 budget provision is higher than the actual FY20 spending, that is only because what was spent was less than what was budgeted. A big opportunity was lost to clean up wasteful farm subsidies such as those on fertilizer and FCI and, despite what the FM says, when real farm incomes rose by just 3% per annum in the first 5 years of the Modi government, expecting them to double requires an annual real income growth of 15% over the next three years!

In the case of the education sector, allowing FDI and ECB are welcome, but till the education policy is freed, this will help only at the margin; ironically, while the policy was supposed to be out a couple of years ago, the Institutes of Eminence scheme brought out is only aimed at freeing educational institutions from the education bureaucracy; the bureaucratic chokehold is all-pervasive.

The budget needed to create a ‘bad bank’ since the problems of real estate and NBFCs will only worsen and, in turn, will ensure credit growth remains poor; without adequate credit, it is difficult to see how GDP growth can rise.

Lowering taxes for on sovereign wealth funds is welcome, but the larger point is that, until the investment climate improves, this won’t really help; just as lowering corporate tax rates didn’t bring in new investment. The fact that a host of import duties have been raised in the budget shows the Bombay Club is back; indeed, India’s competitors are lowering import duties further to improve competitiveness. And for all the of joining ‘global value chains’ and bringing in large players like Apple and Samsung to shift their China operations to India, precious little has been done.



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