Sunday, February 15, 2015

Budget Hopes and Hypes

Fiscal balance
Union Budget 2014-15 was more on aspirations. It had to address the legacy issues. But 2015-16 Budget in the wake of series of policy announcements by the NDA government during the last nine months has promised to be progressive and inspirational. The recent statements of FM leave more expectations on this count.

Notwithstanding the hope of the World Bank President the dragging growth in farm and manufacturing sectors is still a matter of great concern and this led to pragmatic low pitch by the RBI at 5.5-5.7 percent growth at the end of this fiscal.

Inflation has come down but the fundamentals are still weak; gross domestic savings has not improved markedly; credit has not picked up. The domestic food and vegetable prices are yet to record the type of decline that would give confidence to the RBI to tame further the lending rates.

The 14th Finance Commission handed over its Report to the President. Once it is tabled in the Budget session, the new formula of dispensation of resources among the States and Union and between the States and the sub-states would lead the budget formulations.

Expectations on the Finance Minister:

ET raised ten expectations from the FM in its 8th February issue. The call for healthy business climate and rationalized tax regime should not lose sight of the fact that the country is adding more billionaires every year; more middle class but keeping 25% of the population still poor deprived of fundamentals of life.

At the recent economists’ meet the FM promised progressive fiscal policy regime and rationalized tax structure but is unlikely to go ahead with GST, the crucial change required.
The present system of regressive taxation, particularly the indirect taxes in India is probably the most regressive. Direct taxes are no less. The higher the income the higher are the exemptions. Earlier, dividend income was included in income subject to tax. A person in a lower income was taxed at his own marginal rate which could be 10 % or even zero. Now the Dividend Distribution tax 16 per cent applies effectively even to the lower incomes, while those in the higher brackets get a bonanza- nowhere are there such   fiscal imbalances.

By raising the share transaction tax from 0.10 to 0.25 percent the FM can have in the treasury everyday on-line remittance into the treasury the tax free from administrative costs. He can at the same time bring down the corporate tax to a maximum of 10%. There should be also a threshold limit for STT at Rs.2lakhs investment in shares to be fully exempt to encourage the small investors beeline to capital markets.

The Railway Budget should be able to fend for itself. The large component of subsidies should be rationalized and the passenger fares need rationalization. Average passenger rates can pare with AC Bus fares at 3:5. This would arrest bleeding on the Railways.

Rationalisation of subsidies does not mean that the subsidies to the poor should be axed. USA and Europe cannot be allowed to dictate on farm subsidies in India. The Social audit and output reviews by the concerned ministries should be mandated as essential. To get obsessed with the fiscal deficit when the GDP measure escapes many activities in the economy, is perhaps not in order.

Health and Education for all:

Incentives for investments should come from the growth rather than through the exemptions and fiscal management. In the context of our poor rank in the league of nations at 97 out of 131 in the Economic Freedom Index in 2013, it is time to revisit the perverse incentives in health and education sectors and reverse them.

It is time we give up the western model of education and health that has ammunition to hurt the unity of the nation. In the name of charity, education and health investments are moving through hawala routes. This should end through fiscal route.

Senior Citizens look for safe havens:

Senior citizens have their own problems with nuclear families throwing them to the rehabilitation homes to fend for themselves. They expect the existing limit of Rs.1.50lakhs to increase to Rs.2.50lakhs. Even the RBI Governor is in favour of this move.

FM hinted at tax-free budget for 2015-16. Growth orientation demands rationalization of taxes and no-holds barred introduction of GST.It is a tough task to balance the demands of the poorer sections who still constitute 25% of the population and the tax sops required for boosting the manufacturing sector. 

The Author is an economist and risk management professional.
*Published in the Business Advisor, 10th February, 2015.