The strength of its electoral mandate may encourage the government to roll out some serious long-term transformational plans for the country.
The upcoming budget presentation on July 5, being the new Finance Minister Nirmala Sitharaman's maiden budget and NDA-2’s first one, will understandably be watched by market participants with keen anticipation.
It may not be unrealistic to expect it to unveil some reform road maps and some short-term measures to bolster the economy’s prospects. The strength of its electoral mandate may encourage the government to roll out some serious long-term transformational plans for the country. Some such reforms and steps listed below can be politically difficult.
However, the government has the public support to take politically-contentious decisions as long as they are well-intentioned and can fetch favourable outcome for the country over the longer term. Of course, the plans will need to be properly articulated laying out the proposed process, rationale, and the intended outcomes.
Rejig tax rates
Direct tax reforms cannot just drive us towards being a more equitable society, but also improve the government’s revenues. Direct taxes as a percent of GDP that stand at about 4 percent in the country are too low by global standards even though this figure has improved in recent years.
Firstly, tax net needs to be widened in the country. A large number of people in unorganized sectors and in self-employed category does not file income tax returns currently. Further, taxes need to be made more progressive in nature. Prime Minister Narendra Modi has on many occasions applauded the honest tax payers for their diligence and sacrifice.
It would make sense to rejig tax rates and slabs so that tax incidence on lower- and middle-income groups is softened. This can also boost consumption in the system that can be of great help currently in reviving the economy. On the other hand, tax rates should be made steeper with rising incomes. Also, tax compliance near the top of the income pyramid leaves a lot to be desired.
Third, corporate taxes need to be reduced to encourage investments especially from foreign sources, thus aiding job creation process. Finally, the system needs to be made simpler, more transparent, and less prone to frequent and arbitrary changes.
Distribution of subsidies
Subsidy is another area that has been crying out for reforms for a long time. However, owing to political sensitivities most governments have been reluctant to tinker with the way subsidies are administered. The current system of subsidy on petroleum products, fertilizers and food (subsidy on these heads added up to about Rs 2.67 lakh crore in F2019) is poorly targeted and suffers from excessive leakages.
A more focused program based on direct subsidy transfer can actually enhance the benefits for the real needy in the society and also accelerate the latter’s socio-economic progression. Equally important, this can free up government finances from unnecessary and unproductive expenditure.
To begin with, a reduction of about 10 percent over F2019 RE (Revised Expenditure) will release about Rs 26,700 crore for the government in F2020 budget.
Then, the divestment process needs to be streamlined and fast tracked with a clear, well-explained game plan. The budget should ideally explicitly state – unlike in the past – that the government intends to exit most PSU (Public Sector Undertaking) companies as a matter of policy. It should also outline the rationale, targets for divestment proceeds for the next five years, proposed application of proceeds, and the timeline. For F2020, the government should target raising Rs 1.2 lakh crore a 50 percent increase over F2019 RE.
Up defense spending
On the expenditure side, there are areas that need one-time upward correction in budgetary allocation urgently. India’s defence spending as a percentage of GDP has slipped to multi-decadal lows as reflected in ageing military hardware that our forces are using in many areas. Current proposals of the three forces for purchase of fighter jets, helicopters, drones, missiles, anti-missile systems, submarines, naval warships, armoured vehicles, electronic systems, etc add up to more than $50 billion.
This is to be spent over next 8-10 years if these orders are fast-tracked. An accelerated program of defence acquisition needs to be kick-started in order to replenish, modernise and upgrade our armed forces’ capabilities.
This is required not only for plugging the loopholes in our defence preparedness but also for India to achieve its long-term diplomatic and geo-political aspirations. In addition, such large orders can spur development of large-scale local defence industry. Offset clauses mandate foreign suppliers of such defence orders to sub-contract 30 percent of orders to indigenous manufacturers. In this backdrop, giving the defence capital expenditure a corrective push by 30 percent over F2019 RE will imply additional spending of Rs 28,000 crore in F2020.
Higher spend on heath & education
For some time, India’s combined (by central government and state governments) expenditure on each, education as well as health, has been hovering around 3.5 percent – sharply lower than global averages. Increasing the allocation on these two heads by 35 percent each over F2019 RE, will mean a sum of Rs 48,700 crore incrementally in F2020. It will be even better if this increased allocation is made subject to respective state governments implementing similar hike in their budgets. Of course, these gains will accrue over the long term only.
Finally, the government needs to increase budgetary allocation for recapitalizing public sector banks. Indeed, the budget may also need some short-term stimulus for the economy and some steps aimed at revitalization of the rural economy. Hell won’t break loose if fiscal deficit targets are breached by 20-25 bps, but it is important for the government to broadly maintain its solid track record on fiscal discipline.
Understandably, if a road map is laid out early in the government’s tenure and if execution begins now, perhaps in five years, these reforms can deliver the desired outcomes. The government has the support of the people, has intentions to bring about large-scale changes, and possibly has the vision for India’s transformation. Its first two budgets will give some indication if it has the resolve to take the required decisions.(Vipul Prasad is founder and CEO, Magadh Capital)
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