Drawing up a budget is interesting as well as challenging work. There is a plethora of demands from all sections, especially industry. The call for lower corporate tax rates is always amongst the requests made to the finance minister. Sectors want benefits through lower indirect taxes. As GST has blocked one avenue of demand, the focus has turned to customs. The inverted duty argument has got some traction, but the issue is that output for one industry can be input for another. Then there are economists who clamour for higher government spending on capex, even though it is admitted that pushing the economy along will require the private sector’s leadership — Rs 5.5 lakh crore of central government spending cannot drive an economy of the size of Rs 232 lakh crore . Then there are voices of households who need tax concessions as they are affected the most by inflation.
The finance minister has to work with these pressures as well as the uncertainty of how the economy will behave. Government revenue is based on how the economy grows and if there are lockdowns and people cannot consume goods and services, GST collections are likely to be affected. The assumption, therefore, has to be realistic. On the expenditure side, there are several committed expenditures like interest on debt, salaries to employees and pensions to ex-employees. Add to this the subsidy that has to be given for food and fertilizers, and the government’s hands are tied to a large extent. This fine balancing act has to be performed keeping in mind that the ultimate number that analysts and rating agencies look at is the fiscal deficit.
Given this background, what can one realistically expect from the budget? The starting point is the fiscal deficit ratio because this will be the crux of the calculations as it also indicates the quantum of borrowing in the market. The deficit was targeted at 6.8 per cent. But it could come anywhere between 6.5 and 7.3 per cent depending on how disinvestment fares and how the additional Rs 3 lakh crore of expenditure materialises. The government has maintained the borrowing program at Rs 12 lakh crore and will strive to bring it down to avoid overcrowding in 2022-23 when the private sector demand for credit will take off. Therefore, a deficit closer to 6 per cent is what may be expected.
On the taxation side, there are few options for the government as GST has fixed the perimeters of what can be tinkered with. The corporate tax rate was lowered in 2019 and it is unlikely to be affected again. But it would be timely to provide relief to individuals, which though marginal, could be useful. The standard deduction for individuals can be enhanced to Rs 1 lakh which will help the working class. Further, as housing is a thrust area of the government, it may be expected that the government will enhance the deductions on principal and interest payments on house loans. An additional Rs 50,000 may be permitted on each of them. To provide support to savings, which are receiving low returns on deposits and other fixed income assets, the limit under 80C should ideally be increased by another Rs 1 lakh to Rs 2.5 lakh.
The challenge will, of course, be on the excise side where the government has received good returns from the duties on petrol and diesel. With the tax rate being cut by Rs 10/litre during the year, there may not be more scope for further reduction. This means that the assumption on crude oil price has to be realistic. Some forecasters are already talking of a level of $100 a barrel during the year. If this does happen, inflation will heighten which, in turn, will again put pressure on both the Center and state to take a call on taxes.
Since there has been an animated debate on cryptocurrency recently, an announcement of a policy on cryptos cannot be ruled out. The gains from trading could be made taxable, probably at a higher rate than other financial transactions. Further, as cryptos are in the nature of gambling and do not add value, all gains would be of a speculative nature. Given that a stock of at least Rs 7.5 lakh crore is partly traded, there is a scope for picking up considerable revenue. This would be the right time to tax these earnings.
For the corporate sector, the announcements are more likely are to be in the area of the credit guarantee programme, which can be extended for another six months and more sectors brought under its ambit, including the services segment — hotels, restaurants, malls, entertainment , travel agencies — that is among the worst sufferers of the pandemic’s third wave.
The expenditure side may not have any surprises and it will be just a case of focusing on existing headings of expenditure and then taking a call on where the thrust should be. With the fiscal deficit being pegged at 6 per cent, the absolute level, assuming 13 per cent growth in the GDP would be higher than that projected for 2021-22 at Rs 15.06 lakh crore by around Rs 50,000 crore. Therefore, the scope for maneuvering the expenditure will be restricted to a large extent and the choice may really come down to looking at relief expenditure and capex.
The former is important when times are adverse like they were in 2020-21 and to an extent in 2021-22. The PM Kisan scheme, free food, MGNREGA are examples of programs that have been scaled up in these two years. Depending on how the government sees this wave of Covid playing out, a decision could be taken on whether or not it has to persist with aggressive relief and health policies. This will, in turn, support the higher allocation for capex which is the main block for driving growth directly from the side of the government.
This budget will be exciting for economists and analysts as several numbers have to be put on the table. The government has already put forth some effective policies to push growth like the PLI scheme. The budget, therefore, might have a limited reform content. The task should be trying to get more bang for the buck so that the multiplier effects are higher while giving concessions on taxation where required.
The writer is chief economist, Bank of Baroda. Views are personal