Painstaking fiscal consolidation, tax reform, more efficient delivery of subsidies, and a rise in the share of capital expenditure, have created the space to reward tax-payers in Budget 2019 as well as announce a relief measure for farmers in distress without substantially compromising fiscal consolidation.
Capitalising higher economic growth –
- The sops of ₹20,000-₹75,000 crore to the farmers and the tax benefits to the middle class can be given with only a marginal impact on the fiscal deficit. Due to a larger size economy, we can afford to spend larger absolute amounts with only a small rise in deficit ratios and borrowing requirements
- Demonetisation, the goods and services tax (GST) and other steps towards formalisation increased the tax base, and it follows that tax rates can themselves be cut. It makes good economic sense to move towards a system of a wider base and lower rates.
- Tax receipts have grown from 10% of GDP to 12%. Although the GST has not yet resulted in a rise in indirect tax ratios above 5.5%, it is likely to do so in the future as it stabilises.
- The transfers to farmers and tax cuts amount to only 0.4% of GDP this year and are partially funded by a 0.3% rise in tax ratios.
- Jan Dhan bank accounts opened through the country and the Aadhaar data base make a cost-effective Direct Benefit Transfer (DBT) possible for farmers.
Lower inflation –
- A slight rise in fiscal deficits to fund transfers to farmers does not threaten macroeconomic stability when inflation is low and food prices are crashing. Rather, they are likely to help stabilise prices so that farmers do not cut production in the next crop cycle.
- This year, the revenue deficit has been maintained, the primary deficit been reduced, and expenditure on capital account been increased.
- Better quality of government expenditure as well as the GST tax cuts, reductions in obstacles to inter-State trade, and soft commodity prices will keep inflation low.
Government borrowing –
- The size of government borrowing is larger than what the market anticipated, and this has raised G-Sec rates. The rise in gross borrowing is because of higher redemptions but net borrowing is similar to that last year.
- But 3.4% of GDP is not a large fiscal deficit, and market conditions are likely to be more supportive of government borrowing this year.
- As the international rate rise has peaked, with the U.S. Fed turning dovish, emerging market inflows are set to rise, creating demand for G-Secs up to the current cap of 6% of the domestic market and soft oil prices will encourage foreign investors to return to Indian markets.
- When international demand is slowing, it is important to maintain domestic demand. Therefore, tax cuts, more income to farmers and various schemes to improve demand for housing, which has been under stress, are all appropriate.
Improving efficiencies –
- Talking about the burden on next government, well-targeted transfers can be made without destroying fiscal consolidation and creating macroeconomic vulnerabilities.
- The Budget continues the effort to reduce transaction costs and improve compliance incentives. Stamp duty amendments that seek to tax just one transaction, which will be shared across State governments, on the basis of the domicile of the buying client, will reduce a major market irritant, increase transactions and take the country further toward becoming one effective market.
- As income tax returns rise, a less than 0.05% will be selected for scrutiny in non-discretionary, machine-based ways without any interface between the tax-payer and the examining officers, it will reduce potential tax-payer harassment.
India is a very difficult country to change. Problems remain, but the rewards are beginning to appear and should be greeted with cheers.
Source – The Hindu