The annual event of the year for economists is just a few weeks away, with elaborate wish-lists being prepared. These wish-lists are not limited to just economists as industry, business houses, and the aam aadmi each prepares their own versions, their own expectations from the upcoming budget.
This budget comes at an interesting time when the Indian economy is projected to grow at 7.3 percent in the current year, and future growth projections are reasonably optimistic. India is expected to continue to remain as the fastest growing major economy of the world. This growth is supported by heavy capital expenditures by the government in infrastructure.
Global growth was expected to lose momentum in 2023-24 but those expectations did not materialise. It is expected that global growth would indeed lose momentum in 2024-25. There are way too many unknown-unknowns and therefore, one has to be cautious while forming future forecasts.
In any case, Indian policymakers face an additional challenge due to lack of good data given its CPI weights are over a decade ago and that a base year revision even of the GDP numbers are due. Such routine exercises have, in the recent past, been subject to criticisms – some with merit, some without them.
Tackling High Fiscal Deficit
Given this backdrop, there is also the issue of fiscal space and particularly how much can the government consolidate in the medium term to have future space to respond to growth challenges. Many have been looking at tax revenues – both direct and indirect – to argue that India has some fiscal room.
The unfortunate reality is that the pandemic saw the use of much of the fiscal space available in most countries and India is no different. Despite the robust tax revenues, the fiscal deficit still remains high, and it needs to be reduced over the next couple of years. There are choices regarding the pace of reduction in the deficit, for example whether to reduce it by 0.2 percentage points every year for five years or to do 0.5 percentage points every year for two years. The choice and pace of consolidation matters even as both the cases illustrated above reach a 1 percentage point reduction in the fiscal deficit.
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India is in a relatively comfortable situation given that its fiscal position will look much better over the coming years as it transitions to a $5,000 per-capita GDP economy. Basically, more households with taxable income and more income would result in more tax revenues.
So, given that growth is good and fiscal balances are yet to be repaired, what to expect from the budget? The first would be a fiscal roadmap that outlines projected fiscal consolidation over the coming years. A conservative fiscal consolidation roadmap would indicate the government’s commitment to upgrading India’s infrastructure even as it credibly commits to reducing the deficit.
Reforming Tariff Policy
Apart from a fiscal consolidation roadmap, there are several low hanging fruits that could help. An example would be of tariffs, particularly on import of raw materials that feed into India’s manufacturing sector. A trade policy that integrates well with India’s industrial policy will be instrumental in further assisting the shifting of supply chains.
A comprehensive reform of tariffs is long due and would help fix the inverted duty structures that have emerged due to ad hoc tariff changes. A tariff policy consistent with India’s industrial policy and its domestic taxes (GST) has the potential to reduce distortions and streamline domestic supply chains as they integrate with their global counterparts.
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Another low hanging fruit would be to ease the compliance burden and further improve ease of doing business by simple procedural reforms. The standard declaration procedures from other countries can be useful for simplification of processes, reduction in size of the existing forms and pre-filling data through improved data sharing across different departments within a data protection policy architecture.
Simplify Tax Code, Tax Schedule
One more area where there is scope is on India’s direct taxes – and here there are two issues. The first is a revenue neutral issue of adoption of a modern direct tax code. Such an adoption would have no revenue implications as the tax schedule remains virtually unchanged.
However, the new tax code would clearly define different aspects of earnings and simplify the existing tax code. A natural benefit of this would be reduced tax litigation going forward. This is consistent with the push towards simplification and improving ease of living over the last several years.
The second issue is one of the tax schedule – and one where there are difficult choices to be made. It is evident from comparison of India’s current tax schedule (the new regime) that the number of marginal tax rates can be further reduced and the income slabs can be gradually widened.
Doing so would benefit some taxpayers at the expense of others, but at the same time greatly simplify the overall tax schedule. Of course, there is the perennial issue of overtaxing incomes at the top while under taxing incomes at the bottom, but that is a policy preference of virtually all governments to have an extremely progressive taxation structure.
There may be some policy levers that are still available with the Finance Ministry as it finalises the upcoming budget. However, given that the economy is expected to do well, not much is warranted at this stage. A credible fiscal consolidation roadmap is sufficient, anything beyond this is like a cherry on top of a cake – that is, well appreciated.
Karan Bhasin is a New York based economist. He tweets @karanbhasin95. Views are personal and do not represent the stand of this publication.
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