Pandemic mitigation, job creation and climate change considerations need better provisioning.
With over 80% of the annual budgeted expenditure usually allocated to commitments already made and for meeting past debt servicing requirements, the wiggle room for every Union Finance Minister to adequately provide for contemporary needs and provision for new options for growth is highly limited.
A potentially excessive obsession with keeping deficit financing at low levels—irrespective of whether or not the spending is gainful for the economy—ensures that the government is rarely in a position to meaningfully lead from the front, even in difficult times such as the current one we find ourselves in. On top of such constraints, remains the reality that India is almost forever in an electoral mode and there is never a good time to move away from populous measures that may have suboptimal outcomes.
The annual budgetary process in India is eagerly looked forward to. For decades together, it has continued to grab media headlines. This year as well, in Ms Nirmala Sitharaman’s fourth budget in a row, there is palpable expectation of there being real substance combined with relief for most. That said, it is also worth tempering down expectations for those expecting something earth shattering to be delivered on 1 February. This is despite the government-revenue during the first nine months of the current fiscal (April-December ’21) having experienced robust growth. For once, the actual collection is likely to beat the estimates for the full year. The February-March ’22 public offering of equity in the Union Government owned Life Insurance Corporation (LIC) is expected to rake in a decent sum of money, leaving the government with surplus liquidity at the end of the financial year. The much worked upon listing of India on the global bond indices should also soon start facilitating the substantial raising of overseas funds on relatively inexpensive terms.
Such developments could permit the government to somewhat break away from past precedent and turn to the future by demonstrating a greater degree of boldness. This approach could include further augmenting government-resources by tapping into the pockets of those who can afford to pay. Recovering a little more from them, especially to meet the burgeoning Covid-19 related expenses, meets both the taxation-principles of efficiency and equity. Almost all the large businesses, as well as the newly minted Indian billionaire-businessmen, might have become the darlings of the stock-market, but unfortunately, most have eschewed growing the manpower on their rolls and making fresh investments to expand/diversify their manufacturing or processing capacities. In a supply disrupted global environment, a majority have probably hiked up their selling prices to consumers to maintain profit margins despite the inflationary pressures on input costs. The financial performance and market valuations have especially improved for those in pandemic connected industries such as healthcare, pharmaceuticals, e-commerce, food processing and delivery. In the hope that they would perhaps conduct themselves somewhat differently and invest more within the country, the Union Government in 2018-19 had lowered the corporate tax rate to 20% (and even lower to 15% for greenfield investments) to make it globally competitive. Yet, for a variety of reasons, only some macroeconomic related, private investment in India has not recovered since 2016. Despite being enabled to step up their capacities for capital formation, most businessmen continue to be in a wait and watch mode.
While the case to increase the base tax rate on corporates might be strong, the timing for it, perhaps, is not appropriate. To put the economy back on track at this critical juncture, the organised industry must be spared the rod. However, to start with, in the forthcoming Budget the FM could impose a tax on the wealth of individuals as well as corporates above a threshold holding limit. Unquestionably, the already high wealth inequalities in India have only heightened during the pandemic. The top 10% seem to be holding almost 90% of the wealth in the country, with the top 100 accounting for almost a staggering one-fifth of it all.
Yet, the proposal here is not to tax their holdings per se, but to impose a tax on values realised through the transfers and sales effected of their stocks, real estate and other physical assets. Of course, this will be over and above the extant capital gains liability applicable to all citizens. A 10% additional levy rate on those, with say a wealth limit of Rs 100 crore, should not adversely affect their capacities to expand their businesses. Only if the revenue from this new imposition does not build up to a decent size in a couple of years, and the taxman gets beaten by people’s ingenuity in devising ways and means to avoid it, should we consider the time-tested way forward of imposing a 2% wealth tax on the value of a high-net-worth individual’s wealth.
Globally, there has been perceptible clamour to have a wealth tax to defray Covid related expenses. In a study conducted by Oxfam and a group calling itself the Patriotic Millionaires, it is estimated that a progressive wealth tax starting at 2% for those with wealth beyond US$5m and rising to 5% for billionaires, could annually raise US$2.52 trillion. That amount would be enough to lift 2.3 billion people globally out of poverty, including affording them guaranteed healthcare and social protection. Switzerland has long had a wealth tax in place, and a few European and South American nations have introduced it recently to replenish state coffers depleted by Covid-19 relief schemes and regain social trust by endeavouring to reduce growing inequality.
Another tax that needs to be introduced is a carbon tax. This move would be in line with PM Modi’s commitment made in early November ’21 in Glasgow to make India carbon neutral or reach net zero emissions by 2070, drastically lower greenhouse gas emissions, and bring down the carbon intensity of GDP by 45% in 2030. India had demonstrated both courage and realism in rejecting the US led proposal of every nation accepting to become carbon-neutral by 2050. At COP 26, it had led the developing countries from the front to press the industrialised world to first give financial and technological aid and then seek other climate change related commitments.
India now needs to put its money where its mouth is. For facilitating a meaningful transition to renewables, it has to render significant financial help to new players—be it players operating in solar, wind or biomass-based energy generating facilities, producers of cleaner fuels like hydrogen, battery makers or electric vehicle manufacturers. The extant FAME II programme of the Central government to promote the adoption of electric vehicles is grossly underfunded; as are the schemes for making higher capacity, lighter storage batteries to augment the share of renewable-electricity in the transmission systems, electrolyser manufacturing for splitting water into hydrogen and oxygen, and the very production of solar cells to assemble the panels. A carbon tax of say, Rs 500 per tonne, on all emitters with 25,000 tonnes or more of greenhouse gases annually could be mandated. Keeping it at a meaningful level to achieve the purpose of lowering carbon emissions is warranted, and the rates and threshold limits could be revisited from time to time in order to ensure that the country’s net carbon trajectory is in line with its commitments, and it maintains international momentum on climate mitigation and adoption actions. Industrialised countries already have considerable experience in its implementation and India could benefit from their learnings.
A rationalisation of the GST regime is also long pending. Though it is the inter-state GST council that makes the ultimate calls in these matters, the Budget needs to spell out the Central Government’s stand and accordingly, recalibrate its revenue estimates in the budget. The inclusion of petrol and products, as well as electricity, has been on the agenda for quite some time. Neither the Centre nor the States have shown eagerness to push for their coverage under the economically desirable GST mechanism. Both seem to prefer status quo continuance as it gives them unfettered discretion to fix the rates to periodically raise their revenues. In the process, however, both remain virtually unmindful of the adverse effects on the overall inflation induced by the abnormally high energy costs and the growth of the economy getting affected by the offsets on the input costs of the taxes paid not being available.
With the Centre now in a position to push through its agenda in the GST Council, given the BJP and allies ruled states command the required two-thirds of the vote-share, there is little legitimacy left for justifying a spectator-like stand in the matter. The man in the street is paying heavily for the high cost of transportation and electricity brought about by the present arrangement. He yearns for relief from its highly regressive nature. Even if it is put in the highest GST slab of 28% ad valorem, its inclusion will bring much relief. Currently, the average rate of taxes on petrol and diesel is 45%, despite a couple of recent reductions effected by the Centre and a handful of states.
Though there isn’t much flexibility in significantly altering the budgetary provisions for most committed items of expenditure, the spending of public funds must reflect current priorities and planned trends. After over 4 years of slow growth, to get the economy back on track the Government must continue to play the lead role in catalysing consumption as well as investment. To provide the required relief from the third wave of the ongoing Covid-19 pandemic, health care expenditure, including funds needed to vaccinate the remaining 45% of the eligible population and children between the ages 5 and 15 years, would need to be stepped up. So is the need to increase the outlays for nutrition related programmes amongst children and women in the reproductive range. The recently released results of the fifth round of NHFS have starkly highlighted the deterioration in their health after just the very first year of Covid-19. The PM Kalyan Yojana that gives free wheat or rice to the 800 mn odd ration card holders would also need to be continued for most of the new calendar year.
To ensure that MNREGA remains the back stop anchor for the rural unemployed, a greater degree of certainty has to be infused into its implementation. This demands of the Centre to make the full provision in the budget for its operation, and not just make a piecemeal arrangement that has to be augmented later in the year more than once. Otherwise, the resource starved States will continue to run it for only as many days as they have the Central money for, despite there being a national guarantee of 100 days of assured work in a year. The PM Kisan programme, which transfers Rs 6,000 annually in three instalments to farmers and farm labour requires updating to at least Rs 9,000 or Rs 750 a month. Farm input costs have risen and so have living costs. To keep the employment levels, the various guarantees afforded to commercial banks to lend to MSMEs would also need to remain in force. In fact, post the pandemic, the Centre may need to even look at facilitating the quick reopening of labour-intensive services’ segments like travel, hospitality and public transportation through a degree of financial assistance.
Having to borrow a little more than in the past to fund the various relief and recovery measures, as well as to make the GDP growth process more sustainable than seen before, is not necessarily bad economics. As long as public money is gainfully spent to make progress and is delivered to the intended beneficiaries, the rating agencies, lenders and aid agencies are not likely to be looking askance. In several countries including the better developed, the economic stimulus packages were much fatter than India’s and were largely financed through higher market borrowings. Given our current situation, the Indian Finance Minister need not remain overtly concerned with matching expenditure with revenue.
Dr Ajay Dua, a progressive economist, is a former Union Secretary.