Budget 2016-17 should step up capital expenditure, implement tax reforms

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Updated: February 8, 2016 10:26:46 AM

The upcoming Budget should step up capital expenditure and implement tax reforms.

Arun-jaitley-2PTIThe finance minister has announced the government’s intention to implement critical tax reforms in both direct and indirect taxes. (PTI)

Even as the Indian economy is expected to be the world’s fastest growing, it is apparent that demand conditions remain subdued and the appetite for investments is below par. The upcoming Union Budget must, therefore, focus on measures to stimulate domestic demand, given that exports are likely to remain on a declining trend. The Confederation of Indian Industry (CII) has recommended that capital expenditure on key projects in sectors such as roads, railways, irrigation and power be increased substantially, either through higher budgetary allocation or through utilisation of PSUs’ surplus funds.

Public spending has the potential to ‘crowd in’ private investments at a time when private investors remain risk-averse. Particular attention should be paid towards measures for stimulating rural demand, which has been adversely impacted by two consecutive droughts. Rural demand has to be supported not only through higher spending on rural infrastructure such as roads and irrigation, but also through measures to enhance rural purchasing power. Rural inflation has been consistently higher than urban inflation and measures are needed to mitigate the impact on rural incomes.

The Budget should announce some bold steps to address the problem of non-performing assets (NPAs) in the banking system. As of September 2015, NPAs constituted over 5% of banks’ total advances. The government should consider the creation of a National Asset Management Company (NAMCO) which would take NPAs off the banks’ balance sheet and also focus on rehabilitation, recapitalisation and refinancing of banks. This would release capital, provide banks with lendable resources and restore their health.

Higher spending by the government in productive areas should not compromise its plan for fiscal consolidation. Any extra spending needs to be compensated by measures to reduce the subsidy outgo, step up PSU disinvestment and expand the tax base. The Pay Commission pay-outs can be staggered, so that the entire burden is not incurred in one year. There is a need to shift from cash-based to accrual-based budgeting, as it leads to better outcomes. The ministries should prioritise their work, so that they are able to spend the amount allocated to them in the Budget estimate.

The finance minister has announced the government’s intention to implement critical tax reforms in both direct and indirect taxes. The reduction in the corporate tax rate, together with rationalisation of incentives, has the potential to transform the investment climate in India. The government should announce year-wise roadmap for reduction of corporate tax rate from 30% to 25%, along with the withdrawal of incentives in a calibrated manner. The phase-out of incentives should be prospective, so that any investments made on the basis of these incentives should not be affected.

On indirect taxes, the implementation of GST will be a game-changing reform, which will subsume all indirect taxes currently levied by the Centre, states and local bodies, and eliminate cascading of taxes. Industry had been looking forward to its implementation from April 1, 2016, but has been disappointed by the non-passage of the Constitutional Amendment by the Rajya Sabha in the winter session of Parliament. The Budget should announce a revised roadmap for the implementation of GST as well as reasonable tax rates. We hope that all political parties will support the Constitutional Amendment Bill in the Budget session, as the major concerns of the Opposition are now being taken into account.

The Budget presentation by the finance minister has become an occasion that is widely followed across the world for indications of the government’s policy direction. The policy announcements made by the finance minister in the last two Budgets have brought in new ideas in several areas of economic policy. Industry is looking forward to more measures in the upcoming Budget that will facilitate investments and unlock India’s economic potential.

The author is director general, Confederation of Indian Industry (CII)

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