Great expectations II

On the last day of this month, the finance minister will rise in Parliament and present a proposal to spend about Rs 19 trillion of taxpayer money during the next year, from April to March. That’s roughly Rs 16,000 for every man, woman, child of India. This is called the presentation of the Union Budget, and is perhaps the biggest economy speech of the year. Our Constitution requires that not even a single rupee of the taxpayer be spent, unless approved by Parliament. This proposed budget, formally called the Finance Bill is debated, discussed, approved and passed before April 1.

Since we have a single-party majority in the Lok Sabha, a situation not seen for the past 30 years, the Bill should pass easily, without any “coalition compulsions”. The Rajya Sabha has limited powers and cannot stonewall the Finance Bill. It can suggest some changes, which are not binding, and may or may not be accepted by the Lok Sabha.  Even though the BJP has a majority, the finance minister will still need to address different constituencies and ensure a reasonable consensus. Otherwise, he may face a mutiny from his own party colleagues, who face the heat from their constituents. Thus you can be sure that some economically sensible, but politically infeasible ideas won’t be there in the Budget. An example is taxation of income from agriculture. Surely income above a particular threshold, say '10 lakh should be taxed, even if it is from agriculture?

But such thinking is too radical for the FM to contemplate at this stage. The Budget thus contains a series of proposals, which can be collectively termed as the “art of the possible”. It is always a tightrope walk between competing demands for spending, while maintaining a reasonable deficit. India has always had a Budget deficit, since revenues always fall short of expenditure. A diverse democracy has an inherent deficit bias, and anyway the deficit financing is nothing but borrowing from the future. And India has a future of hundreds of millions of unborn young taxpayers!

This will be the first full year Budget of the NDA government under Prime Minister Modi. Going by the rally in the stock market in the past few months, there is an expectation of a big bang Budget. The economy also has benefited from a huge stimulus in the form of a sharp fall in international oil prices. The quantum of this stimulus could be as large as Rs 1,00,000 crore, or about one per cent of the GDP. Some of this will accrue to the government and some to taxpayers.

The benefit to government is in the form of lower subsidy burden on petro-products (like cooking gas and kerosene).  It is possible for the finance minister to utilise this free gift to provide a kick-start to the economy through increased spending on infrastructure. Since oil is cheaper by half, it will mean substantial savings in our precious foreign exchange. This means that we can expect the exchange rate to be somewhat stable. Cheaper oil also means lower inflation due to lower cost of transportation and energy. All this bodes well for economic growth prospects next year. Indeed, the International Monetary Fund predicts that India will become the fastest growing economy, even ahead of China in the near future.

Should the FM use this growth plus oil stimulus opportunity to go for a sixer and ignore all fiscal restraint? Or should he use the extra room, but keep the fiscal promise he made back in July? This is the big debate both within and outside the government. In July, Mr Jaitley said that he was accepting the rather challenging target of 4.1 per cent fiscal deficit set by his predecessor. This was done in the spirit of continuity and for the sake of credibility of the government, especially in the eyes of the international investor community. He also announced that the fiscal deficit would go down to 3.6 per cent and 3.1 per cent in the next two years. With the oil bounty and better growth prospects, it is advisable that the FM sticks to these promises. The opposing camp which says increase fiscal spending hugely, and ignore the deficit target are being too cavalier.
They ignore the fact, that the government spends nearly 30 per cent of its tax revenues on interest alone. 

This is possibly the highest debt service ratio, among our peer nations. Higher deficits lead to higher debt, which lead to higher interest payment. It reduces the room for discretionary spending, such as on welfare, development and infrastructure. In a year when there is an external stimulus of almost 1% of GDP, if most of it is diverted to capital spending, it should still be possible to not cross the Laxman Rekha of 3.6% next year. Such fiscal restraint is rewarded by higher dollar inflows and a possible rating upgrade for India.

There are great expectations from the FM on the reform front. Will he make it easy to start a business? Will he make the tax regime less adversarial? (It was the BJP manifesto, which had coined the term “tax terrorism”) Will he unclog the huge amount of Rs 5 lakh crore locked in various tax disputes? Will he reduce the corporate income tax rate from 34% to say 30%? Or at least remove the cess? (India’s rates are higher as compared to peer countries in Asia). Will the minimum tax-exempt slab go up from Rs 2.5 to Rs 5 lakh? Will we move along the tax reform path charted by the Kelkar Committee: Lower tax rates, fewer exemptions and simpler tax code? Will subsidy payments be more streamlined to be paid through bank accounts, created in the Jan Dhan Yojana thereby reducing leakage?

The Budget speech is one of the most watched television live shows. Analysts will parse every word, scrutinise every, and even count the number of times the FM drinks water from his glass. But what matters ultimately, is how well the Budget manages the heavy burden of expectations, without spilling out of fiscal limits. A former NDA FM had said he just wanted to provide more money in the housewife’s purse. That is possibly the essence of it all. Good Luck Mr Finance Minister!

The writer is an economist and political analyst