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  1. Column: Budget 2016 – Caught in a chakravyuha?

Column: Budget 2016 – Caught in a chakravyuha?

To assume the budget gives more space to the financial system for lending to support rate-cuts may not be realistic

By: | Published: March 3, 2016 12:18 AM

After the build-up of expectations from Budget FY17, the time is now ripe to evaluate whether hopes have been fulfilled. We are faced with a difficult international environment, a poor investment climate, a distressed rural sector and competing demands for spending. In this situation, it was hoped that the finance minister will take the bull by the horns to ease the situation. This is particularly because the government is in the middle of its current term and it is possible to take bold and unpleasant measures now so that the benefits of these could be reaped when it is ready for the next general elections. However, we do not see much reform content. Although the finance minister rested his budget formulation on nine pillars; an overwhelming proportion of the budget speech is devoted to state subjects like agriculture and rural development rather than issues of macroeconomic stability, arresting falling exports and revival of industrial climate.

The finance minister must be complimented for sticking to the fiscal deficit target set in the FRBM Act in spite of compelling demands for increased expenditures and a chorus of voices demanding increased government spending to revive the sagging private investment climate. What is important is that this has been done by reducing both revenue and primary deficits. However, to assume that this will result in higher lending space for the financial sector to support lowering of interest rates by RBI may not be realistic. There is considerable amount of borrowing hidden in the budget through special purpose vehicles for public investment, particularly for the national irrigation fund (R20,000 crore) investment in railways (the IEBR of R76,000 crore) and roads (R31,300 crore). The household sector’s financial saving is just about 7.6% of GDP out of which lending to the Union and state governments will consume 6%. With such large borrowing planned through special purpose vehicles, there will be hardly any resources left with the financial system to lend to private investment. Although these additional public sector borrowings are not a part of the government’s fiscal deficit, it certainly matters when decisions on policy rates are taken by RBI and even if it makes a benign decision to reduce policy rates, the financial system will not have lending space to transmit lower rates to borrowers. The time is opportune to consider public sector borrowing requirements to analyse the lending space to the private sector though, for determining the debt sustainability, primary deficit should be the focus and to calibrate counter-cyclical fiscal policy, it may be more appropriate to consider the targets in a range rather than taking point estimates. Hopefully, the review of the FRBM Act announced in the budget will consider them.

The disappointment with the budget comes from inadequate allocation to infrastructure investment. At a time when Make-in-India requires the government to provide competitive levels of infrastructure, the capital expenditure of the government is just about 1.64% of GDP which is lower than even the revised estimate of FY16 (1.75%). Even this could fall short if the assumed high levels of revenue from spectrum auction do not materialise. The government could have been bolder in compressing subsidies which is budgeted at R2.5 lakh crore to release more money for capital investment. In particular, both food and fertiliser subsidies are dogged by special interest group politics. The urea price has not been revised for over 10 years and this has only helped to distort the use of fertiliser in farms. Besides claiming taxpayers’ money, these create distortions and are environmentally unfriendly.

The budget proposes few measures for simplifying tax administration. Attempts to reduce discretion to the tax collector and reduce litigation are important. The establishment of the dispute resolution panel and disallowance of the income tax department to appeal against the direction of the panel, increasing the threshold for audit and presumptive tax, application of sunset clause for some tax incentives too are welcome. However, loading the tax system with additional objectives like employment generation and affordable housing only adds to the already existing multiple objectives and that only further complicates the tax system. Further, disappointment sets in when we see increases in customs duties on many items in the name of Make-in-India. It is doubtful whether the amnesty provided for declaring unaccounted incomes would yield much and in any case, it does not deal with the generation of black incomes. Increasing the securities transaction tax and levying the dividend tax in the hands of rich taxpayers is controversial. The reason for levying the dividend tax on companies was to avoid the problems of collecting it from individuals. Now, we have dividend taxes on both companies and individuals and if the objective is to tax the rich more, it should have been done changing the rate structure rather than levying additional tax only on dividend incomes.

There is hardly any measure to facilitate the much-vaunted GST. The budget could also have taken measures to expand the base of excise duty by reducing the threshold and pruning the exemption list which has over 400 items. At the same time, it could have facilitated increasing the threshold for service tax to pave the way for having a uniform threshold when the GST is finally implemented. There are a number of items of so-called common man’s consumption such as breakfast cereals and packed juices on which the rates were reduced in 2010 and the time was opportune to classify them into general category.

An important development since the Fourteenth Finance Commission’s award is that many of the additional tax measures are done by levying cesses and surcharges. Not surprisingly, the revised estimates of net tax revenue for the Union government after devolution in FY16 is higher than the budget estimate for the year by R28,000 crore whereas the states’ share has shrunk by about R17,700 crore. Thus, in the revised estimate, the share of the states in gross tax revenue shrunk to 34.6% from 36.2% in the budget estimate. In FY17, with an additional 0.5% surcharge in service tax, the practice of mopping up resources for exclusive appropriation by the Union government has continued. The Fourteenth Finance Commission had also made the recommendation to raise the ceiling on profession tax to augment the resources of local governments from the present level of R2,500 To R12,000. However, the finance minister has chosen to ignore the recommendation.

On the whole, the budget is incremental, and like the proverbial curate’s egg, it is good in parts. It was a fond hope that in the difficult environment that the country is, the budget will provide a clearer policy direction to come out of the chakravyuha. However, the forthcoming elections in the states seem to have weighed heavily in the making of this budget and the wait for the “good days” got longer.

The author is emeritus professor, NIPFP, non-resident senior fellow, NCAER and member of the executive council, Takshashila Institution.
E-mail: mgrao48@gmail.com

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