Budget 2018: With India’s macros worsening, budgeting for FY19 is not going to be easy. Rising crude oil prices will widen the CAD, and the government will have to find more money for oil subsidies even as higher imported and local inflation will push up prices and the cost of money. But given it is the last full-fledged budget before the next general elections, the government should go all out with a bold mix of reform measures, a jump in capex and tax-cuts to put more money in people’s pockets. Indeed, the uptick in global growth and trade is a big plus for exports. But there cannot be a sustained upturn unless labour laws are eased. As CRISIL has pointed out time and again, Indian exporters are fast losing their competitive edge. The government must guard against any new grand-sounding schemes and focus on the existing ones. It must ensure all expenditure will be productive.
The big deliverable, this time around, is jobs. That calls for a much bigger capital outlay than the Rs 3.1 lakh crore and, consequently, a bigger balance-sheet; an extra 50 bps of deficit on a nominal GDP of Rs 200 lakh crore, would give the government an additional Rs 1 lakh crore to spend. But while outlays for roads, ports, rural electrification and other infra ventures will, no doubt, boost employment, a concerted focus on textiles, real estate and construction can move the needle. More important, the private sector must be roped in; the government must convince promoters to participate in projects. In fact, even resuscitating stranded assets will make a difference. For instance, the hundreds of half-finished realty projects can be handed over to solvent promoters—without the courts getting involved—to be completed.
Think of the multiplier effect—and the feel good factor—that could be created even if half the inventory of 5 lakh homes is sold. While that can kick-start the economy, the private sector will not invest—no matter how attractive the sops—unless labour laws are more flexible. To be sure, the states must focus on these too, but the government has failed to bring about the changes it had promised. In the near-term it must give some additional sops—relax Section 80 (j)(j)(a), for example—to nudge companies to hire more.
And having promised to lower the corporation tax to 25%, the FM must now drop it to at least 28% and withdraw the 12% surcharge; MAT must fall to below the corporate tax rate because the difference right now is very small, given the effective corporate tax rate could be anywhere between 18% and 23%. He will then be justified in retaining the DDT, currently charged at 20% of dividend paid out. Now that the GST has been rolled out, and the government is armed with more information, there should be better compliance leading to better buoyancy. Also, it is important that corporate insolvency cases under the IBC are resolved quickly so that the assets are not wasted. The government should make it easier for prospective buyers by tweaking the rules if necessary, such as those in Section 79, to facilitate the transfer of assets. If even a handful of companies move to stronger promoters, the mood in corporate India will change completely. In the meantime, individuals could do with some cheer.
Even ahead of the Arvind Modi committee, the government could start putting in place a cleaner and less steeply graded personal income tax structure even as it starts to phase out exemptions. The 30% rate, for instance should kick in, not at an income level of Rs 10 lakh but perhaps at an income of Rs 25 lakh. A lower headline rate and a withdrawal of surcharges will be a surefire winner, and the government will score more than just brownie points. Since it is hard to tax certain products—the EPF, for instance—the better way to boost revenues is by gradually pulling out exemptions. That will mean less evasion and avoidance; today, assessees on the border of one income bracket are finding ways to slip into the smaller one by using the exemptions. Indeed if the government does drop tax rates, it could simultaneously pull out a couple of exemptions—such as section 80D for instance—without causing much heartburn.
In fact they may even forgive the FM if he tightens the rules for long-term capital gains tax (LTCG) from the sale of shares. There is a case for the LTCG kicking in after three years, rather than after one year as it does now. While many argue that the markets would sulk and that it would queer the pitch for more disinvestments, there seems to be enough local liquidity to support fund-raising by companies. If growth and employment pick up, that would be would be reason to invest. There are those that argue flows into debt mutual funds slowed after the change in the levy of LTCG; that is surprising, since income schemes make for far better investments than bank deposits given the indexation benefits that they attract. Investors are a greedy lot always asking for more and unwilling to give up even a little. Rather than relying on financial investors, they must try and offload stakes in state-owned firms to strategic investors wherever possible.
Where’s the harm in selling off a few public sector enterprises? Why not bring in a foreign miner to hold a big chunk of NTPC or Coal India? These sales might seem impossible in a pre-election year since the unions will revolt, but they are worth a shot. Unless disinvestment and strategic sales bring in about Rs 1.5 lakh crore in FY19, the tax cuts might not be feasible. There is little point in holding on to stakes in companies such as ITC or L&T or even the state-owned banks—better to dilute the holdings or even liquidate the assets altogether and put the money to work by building productive assets.