“Politics is the gentle art of getting votes from the poor and campaign funds from the rich”. It’s a compelling motto any Finance Minister pursues in his final budget in an attempt to please all, before the general elections of 2019, when considerations of good politics and good economics must converge. Yet, hours before Prime Minister Narendra Modi’s plenary speech at Davos, the annual Oxfam survey’s findings that the richest 1% in India cornered 73% of the wealth generated in the country last year, while the poorest half saw their wealth rise by just 1%, must be a worrying concern of rising income inequality for the FM to deal with in his budget.
Taxpayers expect the Finance Minister to be generous in spending, but also benign on tax collection, yet adhering to the fiscal deficit target of 3%. The problem is, thus far it’s been mostly government spending on infrastructure which has sustained growth, with private capex languishing at a 13-year low. With the need to recapitalise banks, increased spending on food subsidies, MNERGA, fiscal stress of farm-loan waivers, rising price of crude oil, uncertainties over revenue flows post-GST adjustments and a populist budget in the offing preceding elections, there are further constraints to the FM’s task. However, as I write, there are encouraging data points emerging, as in the government having mopped up Rs 90,000 crore from disinvestment this financial year; that it will persist with fiscal prudence by cutting borrowings from Rs 50,000 to Rs 20,000 crore, as direct tax collections have risen by19%; bank credit is at a two-year high, and households are allocating more capital to financial assets.
With increasing competitive taxation being pursued by the Donald Trump administration, it will trigger a healthy global competition to lower taxes, as it’s estimated that $2 trillion in tax-havens could return to the US. India must also transition to a lower tax rate, as promised by the FM in 2015. PM’s debut in Davos is an opportunity to accelerate inward FDI in a year when India has had to sit out of the synchronised global growth in order to generate jobs and fulfil his electoral promise. Lowering taxes has empirically seen as improving tax compliance when rates are predictable and benign. Trump’s lowering corporate tax from 35% to 21% relies heavily on the assumptions of revenue buoyancy, as economists propound that a higher GDP growth is achievable due to decreased taxation, which compensates for the cut in taxes. In India, with a middle class of 550 million, lower taxation would free a lot of money for savings and to kick-start the virtuous cycle of consumer spending. All governments prioritise tax compliance, considering in a population of 125 crore, unfairly only 2% pay income tax. However, the rise in personal income tax receipts by 19% in advance tax collections is creditable, and attributed to the widening tax base post demonetisation.
Herewith are some perceptions on the economy in the last lap of BJP’s governance.
* It is speculated there could be relief for the 27 crore middle class by hiking the taxable limit from the existing Rs 2.5 lakh to Rs 3 lakh, as also an increase in 80C exemptions from Rs 1.5 lakh to Rs 2 lakh, while demands persist to reduce peak IT rates to 25%, and abolish Angel tax that fund much needed start-ups.
* Also there is talk of the re-imposition of estate duty, an acceptable tax in the developed world, but was abolished in 1985 because of the high administrative costs of implementation.
* The true potential of FDI liberalisation can only be optimised when Indian suppliers play a greater role and strengthen Make in India, which will generate job creation.
* The erosion of BJP’s rural base as was seen in Gujarat elections, places the government in damage control mode to prioritise agriculture. As 66% of the population resides in rural India, to win back rural votes and achieve the goal of doubling farmers’ income by 2022, government must shift focus from farm subsidy to farm investments. This can be achieved by encouraging modern crop science and upgrading to the latest trends in agronomic practices to raise MSP, enhance linkages to the markets, and increase profitability. Food inflation is rising, yet farmers don’t get a good price for their crop. Ultimately, India must transition to an urban economy, shifting jobs into services and manufacturing.
* Sectors that have a multiplier effect on growth and employment generation must get top budgetary allocations, like low-cost housing, construction, infrastructure and skilling for employment, as 92% of labour force is comprised of the unorganised sector, which gets jobs through these industries. Despite the government’s stance in cleaning up and regulating the real estate sector, it must accord industry status to the fourth largest employment generator in India, and grant higher IT benefits to first-time home buyers.
* Windfall gains from fall in crude oil prices due to lower import costs and higher taxes were never passed on to consumers. Now, with the headwinds of rise in global oil prices, government must reduce excise to prevent the inflationary impact.
* Since the start of the ambitious Smart City Mission, only 5% of identified projects have been completed. With an outlay of Rs 135,958 crore, only 1.4% has been spent, which is a missed opportunity at jobs generation.
* Healthcare must be made more affordable and accessible, as also the limits for I-T exemptions for health insurance must be increased. The budgetary allocation for education remains abysmally low at 4% of GDP. Also, there is under-utilisation of funds allotted, and an under-allocation to these vital sectors of economy.
* While indirect taxes are expected to rise in the next fiscal only once GST teething problems are ironed out, it’s in the non-tax revenues that GOI would look to maximise shortfalls by way of monetisation government assets in real estate, sale of natural resources like spectrum, and equity sale of PSUs.
* Regarding BJP’s millennial outreach to the first time voter, who will cast his/her vote next year, the government needs a stronger economic message of optimism, more than an ideological or nationalist appeal to find favour with the youth. Because the youth comprising 65% of the electorate, are more concerned about “bread and butter issues”, and not history or mandir. When PM sees India’s 800 million youth as “potential entrepreneurs”, the thought is similar to what was considered as India’s great “demographic dividend” one hears little about today. The new technology start-ups aggregating 5,000, dropped by a quarter this year due to a drop of 53% in seed investments, despite “the state fund-of-funds”, which has an allocation of Rs 10,000 crore. GOI’s thrust at promoting self-employment by “making youth job givers, instead of job seekers” is an attempt to make a virtue of a necessity in failing to create the 10 million jobs it promised, as Start Up India, Stand Up India and Mudra Yojna that facilitate loans to these platforms have really not yielded the optimum results. Because private entrepreneurship happens only in the secondary curve of a professionals growth after graduation and internship, when risk-appetite increases to take a bank loan and dispense with the security of a monthly salary assured when working with the government or private job.
Despite adequate FDI inflows; a vibrant stock market having zoomed past the 36,000-mark and is at mismatch to the real economy; benign inflation rates; improved efficiency in direct benefit transfers to actual beneficiaries and removal of discretionary powers of babus through simplification of procedures, much more needs to be delivered to secure a comfortable return of the Modi Sarkar. With eight state elections slated in 2018 and the general elections in 2019, GOI has little time to close in on its promises towards its two largest vote banks, that of youth and the farmer. The rest of us could also do with a liberal dose of the FM’s largesse and hope for some achhe din before 2019, as I end with a humorous tweet: “I am minority in India, I want reservation. We are only 2.53% of the population…my caste is Income Tax payer.”
Bindu Dalmia is author and columnist.