Upcoming budget will be tough to balance

Finance Minister Nirmala Sitharaman has the unenviable task of pushing growth, while maintaining fiscal discipline
Over the next 20 days, two major policy events will take place — the Budget and a GST Council meeting — that will reveal the government’s intent and vision for the next five years. While there are a number of issues that it can take up at both these events, there are three main problems that are relatively more noteworthy.

The first is the issue of private investment and how, despite the government’s best efforts so far, it has not recovered enough to shoulder its share of the burden as a prime driver of economic growth. The second issue is the fiscal deficit and whether the government is artificially hamstringing itself by curtailing public expenditure in order to meet an arbitrary target. In other words, can the government afford to shift the target meaningfully to, say, 4% from the current 3.4%?

The third important policy element is whether the government can afford to reduce GST rates even further and whether there are any more steps it can take to widen the tax net. The first two issues are to be addressed in the Union Budget, while the third is the exclusive domain of the GST Council. However, in all three, it has only limited options.

The consensus view among economists seems to be that the government has pretty much done all it can in terms of creating the right environment for the private sector to grow. Policy measures such the Insolvency and Bankruptcy Code, the ‘Make in India’ initiative, power sector reforms, easing of FDI norms, and the concerted effort to improve the ease of doing business are all considered welcome steps.

In the Budget, however, there are a few steps the government can take that can make it more attractive for the private sector to invest.

However, the caveat here is that this positive impact on the private sector will not be felt in the very short term. That is, capital expenditure undertaken in this financial year will only begin to boost the private sector in the next financial year.

Here, too, while there is no guarantee that reducing corporate tax rate will definitely lead to increased investments, it is definitely seen as a good first step.

So, if increased capital expenditure and reduced corporate tax collections are the major way private sector investment can be encouraged, then the natural extension of that argument should be that the government give itself some more flexibility when it comes to the fiscal deficit. While this might seem logical, the government’s own actions have rendered this option nearly impractical.

In other words, since tax revenues either through direct taxes or indirect taxes did not meet their targets last year and don’t look like they will this year, the only way the government can increase its expenditure is by borrowing more. However, by committing to repay debt taken on by the public sector on its behalf, the government has tied its hands in this regard as well.

The only practical option before the government is for a favourable recommendation by the Bimal Jalan committee on the quantum of the Reserve Bank of India’s reserves that can be transferred to the Centre.

There is another engine of economic growth, which, while firing strongly so far, has now begun to show signs of weakness — private consumption expenditure. Individuals, driven by static salaries but increasing costs, have begun to defer purchases and this can be seen in a number of metrics that have slowed down, such as car sales. Boosting personal consumption can also go a long way in reviving the private sector.

One way to encourage individuals to spend more is to increase the amount of money in their pockets. That is, reduce the tax burden. There is some talk in the Finance Ministry about reducing GST rates and addressing the revenue shortfall by widening the tax net. The view among tax experts is that the tax rates currently are already significantly lower than those in the pre-GST era. And, while the impact of a cut in rates affects revenues immediately, the positive impact of trying to increase tax compliance is felt with a delay.

With agency inputs

rupee