Budget 2018: A Budget is like fast-food. You can discuss it in anticipation, listing the ingredients you would like it to have. Once it is presented, it gets stale very quickly. You can talk about it on the day it is presented, but by the next day, it is a cold snack not worth chewing. So, what about the last full budget of the NDA government? Everyone is agreed that Jaitley has limited room for manoeuvre. The shortfall in GDP growth rate makes it urgent that he pulls a rabbit out of the hat. The fall in the GST revenue after the first three months means that depending on more recent data, the revised estimates of deficit for the FY18 year may put the deficit target the FM promised under strain. As it was, he had given himself a breather from the relentless pursuit of the path of deficit reduction. Whatever the outcome on February 1, he will not have much room for extra expenditure which may raise budget deficit next year to boost the economy. As of now, it looks like he will have to restrain himself.
My guess (prediction would be too pretentious a word) is that the revenue shortfall from GST will be corrected for FY19. The FM will have more cheerful news to put in the budget estimates for tax revenue. He has already signalled that some income tax relief may be offered at the lower income bands. As only a minuscule proportion of the population pays income tax, I have been in favour of abolishing the income tax. There are people who still believe that income tax is progressive and to abandon it would be regressive. There is no reason to believe that. The definition of income becomes tricky once you go beyond the salaried. All sorts of deductions are given or ways found to hide income. What follows is then criticised as tax-terrorism by those interested in not paying up.
Watch video: Budget 2018: FM Arun Jaitley may tweak Income Tax basic exemption limit
It is always better economics as well as sound psychology regarding tax-payer behaviour to tax consumption rather than work. Tax people when they are enjoying themselves. I know that when I am eating in a posh restaurant in Delhi or Mumbai, the bill tells me the tax I pay. It is hefty but it comes at the end of my good meal, and I don’t employ tax advisers to dispute the bill. I just pay up. I, along with my friends, fall among the people who come into the income tax net. The scope of GST can be extended to things the higher income earners would buy and that could possibly replace income tax. The objection to taxing consumption rather than income is that a lot of spending is in cash terms. But those people do not come into the income tax net. The idea is to catch that small proportion of the population who fall into the net and get them to pay a consumption tax. I know it is unlikely to happen, but one can make a consumption tax as progressive as you like. It is also more difficult to evade. You can end tax-terrorism easily if you make the switch.
The punch-line is that if GST revenues are buoyant in FY19, the FM may not need to relax his pursuit of deficit reduction. One important reason is that India relies more on the global economy than our economists admit. Our trade deficit can only be financed by capital imports. It is better for us that these flows be in the form of FII or FDI. The FII flows are very conscious of budget discipline. The ratings agencies influence the decisions of FIIs more than we would like to believe. The need to pursue fiscal orthodoxy is for that reason. The GDP growth shortfall of last fiscal year has been partly due to the twin reforms: DeMo and GST. But their effects will be washed off in FY19. The global economy is also growing better. Thus, we can expect the Indian economy to have a positive boost from global forces. The IMF has been signalling this and could be right.
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The only unpredictable drag is agriculture. Even after 70 years of plans and development, India still shamefully takes a gamble on the monsoon. The sector is shrinking in importance as a contributor to GDP, but not in terms of the proportion of the population dependent on it. The fiscal drag of debt cancellation is costly even if the costs may fall on state budgets. Overall, Jaitley should be able to give us an optimistic budget without abandoning fiscal prudence. The task of raising GDP growth rate will be partly done by the short-run effects of reforms being washed out and partly by the GST reform yielding its benefits.