By Janak Raj
The Indian economy is passing through a critical phase. Apart from addressing the immediate challenges facing the economy, the upcoming Union Budget also needs to boost India’s growth potential over the medium term by resetting priorities. The following are some of the specific areas which the Budget could focus on.
First, the slowing down of private consumption is worrying, especially because if the slowdown persists, it will further delay the revival of the private capex cycle. It is, therefore, imperative to give a boost to private consumption. The forthcoming Union Budget will do well to provide a significant relief to the middle class, whose purchasing power has been eroded significantly due to persistently elevated inflation of the past few years without hardly any income tax relief. To make up for the loss in revenue, the government needs to focus on improved compliance. It is intriguing that only a small portion of the population (less than 7%) files tax returns.
Second, it is important to continue the fiscal consolidation process, not only to free resources from the rising interest burden but also to create the fiscal space for dealing with any future shock. Even after five years of relentless fiscal consolidation, the debt-gross domestic product (GDP) ratio remains elevated and requires further reduction in the primary deficit. Alongside, the government needs to continue to improve the quality of expenditure, as it has done in the past, to counter the contractionary impact of fiscal consolidation.
Third, historically, India has prioritised economic growth with a relative neglect of human development. Empirical evidence as well as the experience of many advanced economies suggest that human development plays a pivotal role in economic development. It is, therefore, imperative to place human development at the centre of policymaking. Despite being one of the fastest-growing economies in the world since the several years, India lags its peers in key health and education indicators. Public spending on health (excluding water and sanitation) in India is at an abysmally low level of 1.4% of GDP, and it is nowhere close to the target of 2.5% of GDP set for 2025 in the National Health Policy 2017. While states have stepped up health spending in recent years, health spending by the Centre has stagnated at 0.2-0.3% of GDP in the last 35 years, other than 2020-21 and 2021-22 when health spending increased to 0.4% of GDP. Likewise, India’s public spending on education at 4.6% of GDP remains far below the target of 6%, which was first articulated in the National Policy on Education, 1968, and reiterated in all subsequent education policies, including the one in 2020. India cannot be expected to realise its full economic growth potential by ignoring human development. The forthcoming Budget, therefore, is an opportunity to prioritise human development by sharply raising the allocations both for health and education.
Fourth, divestment in government equity in central public sector enterprises (CPSEs) is not only important to unlock their value, but also to raise revenue and reduce the fiscal deficit. The government has always missed the disinvestment targets since 2010-11, other than in 2017-18 and 2018-19. Of 272 operating CPSEs in March 2024, 66 are listed on the stock exchanges. Many of them have now become favourites with investors, with their market capitalisation rising more than three-fold in three years from Rs 12.2 lakh crore in March 2021 to Rs 37.2 lakh crore in March 2024, following the re-rating of several CPSEs by the market. This excludes public sector banks and insurance companies, whose valuations have also improved significantly. The government needs to take advantage of this to divest equity in them in a calibrated manner, the proceeds of which could be earmarked for spending only on health and education. The government could publicly announce its intention to do so, which can also help blunt any opposition to privatisation. Disinvestment can also create a positive sentiment and help kick-start the private capex cycle.
Fifth, saving is a function of income and saving in a particular instrument is a matter of risk-return perception of investors. Therefore, government policy should be neutral to various savings instruments. However, at present, there are different tax rates and incentives on different instruments such as bank deposits, small savings instruments, life insurance policies, provident funds, and capital market instruments, which distort the risk-return perception of investors. Bank depositors in particular are hugely disadvantaged for several reasons. First, bank depositors pay explicit income tax on deposits at the marginal rate of tax, which investors in most other savings instruments do not. Second, bank depositors also pay implicit tax as banks earn no interest on the cash reserve ratio maintained by them with the Reserve Bank of India and earn less than the market interest rate on government securities acquired to maintain the statutory liquidity ratio. This burden is ultimately passed on to depositors. Third, bank depositors get no benefit of the distinction between short- and long-term investments. While the rationale of such distinction in the case of equity investments is to discourage short-term/speculative investment, such benefits are also available in the case of debt mutual funds. Fourth, bank depositors do not get the benefit of deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. The Budget needs to provide some immediate relief to bank depositors, which will also help boost consumption. Over the medium term, the government needs to take a holistic view of all taxes and incentives on various savings instruments with a view to rationalising them to ensure that they do not distort the risk-return perception of investors.
To sum up, it is important to focus on the domestic economy even as we make efforts to navigate the challenges emanating from the uncertain and unpredictable external sector. While addressing the immediate challenges facing the economy, the Budget needs to raise the medium-term growth potential of the economy by prioritising human development.
The writer is senior fellow, Centre for Social and Economic Progress (CSEP).
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