A new-found confidence over the well-handled Covid-19 crisis found its way into Budget 2021. This is reflected in three aspects of the budget. One, the finance minister ignored suggestions to tax the rich with a higher surcharge or a Covid-19 cess. Two, the government has gone for growth with a large push on capital spending. Three, the FM has cleaned up the balance sheet of the government and removed the anomaly of using off-balance sheet items to show lower borrowings.
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When thousands of tractors run amok over the roads of Delhi, battering public goods and public servants because the demand of a section of ‘farmers’ for repeal of farm laws is not met, it is a good time to ask some questions. Who are these people and how is it that they drive in SUVs, ride tractors and seem to have a lavish lifestyle, pay no income taxes, yet want subsidies and state guarantees to continue?
In fact, it is a good time, just ahead of Budget 2021, to ask, why just 1.5 crore people out of 130 crore Indians pay income tax? And why is it that the small fraction of people under the tax net continues to be pressed harder and harder each budget with cesses and surcharges that add to the tax burden. There are between nine and 11 tax categories (depending whether you choose the old tax system where you claim deductions or the new tax system introduced in Budget 2020) with the highest surcharge reaching 37% for incomes beyond Rs 5 crore, giving India a very high marginal income tax rate of 42.7%. With the personal income tax to GDP ratio a tiny 2.5% (France does 9.5% and Germany 10.4%), India’s state capacity to fund infrastructure, health and education is seriously impaired.
Budget 2021 is being seen as the bounce back budget that will trigger growth. I want Budget 2021 to do three specific things, in addition to finding that magic path between fiscal prudence and growth.
One, bring tax democracy – find ways to get those who have escaped paying taxes for decades into the tax net. Income from agriculture is given a free pass, but this provision has been used to launder non-agriculture income and has allowed rich farmers to get away without paying their share. Although it is a state subject, some way to tax this income must be found.
The other cohort that evades taxes are the self-employed who report far lower incomes than their lifestyle or assets support. The government has been toying with the idea of pre-filled tax forms where it collates the big data of spending and assets and puts down the tax due from the PAN holder. This will not only reduce costs of compliance but also put the onus on the tax payer to deny that the spends and the assets are indeed hers.
Two, India needs a consumption spending push to deepen the profit-led growth so far, but we simply do not have the fiscal room to do the kind of doles seen in the US, UK and mainland Europe. A possible way out could be to allow those earning above Rs 15,000 a month an option to not contribute their part of the Employees Provident Fund (EPF) money for a year. The law makes a 12% contribution mandatory only to people earning upto Rs 15,000 a month of income, however in most offices make it a mandatory cut. The government can advise firms to offer this option to eligible employees. However, the employer’s contribution continues. The government can decide if it is a retrospective return of money collected for FY 21 or a prospective benefit for FY 22. This puts money directly in the hands of the category of people not that badly hit by Covid to spend.
And three, the government needs to spend on building infrastructure, but again there is limited fiscal space. The disinvestment road is already there, and I am hoping that there is movement on both Air India and the LIC stock sale, but there is another route to get long-term funds for infra projects. This is to use the Indian household’s love for government guarantees to offer them a deep discount bond. This is a zero-coupon bond that does not give periodic interest, but the investor gets a defined amount back after a number of years. Make it tax free – exempt, exempt, exempt – and lock-in the money for 15 or 20 years. Household money is very sticky, other than HNI investors, most retail investors stay invested for years and they like certainty of the future value and date of maturity of their investment. The government should use this investor preference for government guarantees to find a way to directly sell the bond to them.
India needs innovative solutions to the age-old problems of too few people pulling the income tax burden and pockets of beneficiaries cornering the government spends.
Monika writes on household finance, policy and regulation.
Prime Minister Narendra Modi interacted with leading economists of the country on charting the economic agenda in the post-COVID world and highlighted government’s commitment to developing world-class infrastructure and the economic potential set to be unleashed by National Optical Fibre Network.
He highlighted the faith shown by foreign investors in India’s growth story, with foreign direct investment growing by 11 per cent between April and October, despite a global recession.
The participants stressed the importance of investing in public health and education, as human capital would also likely emerge as a driver of growth, especially in the knowledge economy going forward. They also stressed on labour-intensive manufacturing given the success India has achieved in launching the PLI scheme in mobile manufacturing. The interaction was organised by Niti Aayog.
“Government expenditure on infrastructure was a point made by many participants as a driver of growth in the coming years, given the significant multiplier benefits that accrue to the economy from public investments in infrastructure. A focus on labour-intensive manufacturing was also mooted by participants, given the success India has achieved in launching the production linked incentives (PLI) scheme in mobile manufacturing,” a release by NITI Aayog said.
It said the participants agreed that high-frequency indicators were showing signs of a strong economic recovery and that too earlier than expected.
They were broadly in agreement that next year will see robust growth and suggested measures to maintain this growth rate to drive India’s socio-economic transformation.”
“The participants highlighted the strong structural reform measures that have been undertaken in the past few years and how they would help in the creation of an Atmanirbhar Bharat. Suggestions were made by participants on future reform areas,” the release said.
The Prime Minister explained his vision behind an Atmanirbhar Bharat, where Indian companies are integrated in global supply chains in a manner not seen before.
“PM Modi further highlighted the economic potential set to be unleashed by the National Optical Fibre Network, providing internet connectivity to some of India’s most remote areas. On infrastructure, the Prime Minister highlighted the National Infrastructure Pipeline as the government’s commitment to developing world-class infrastructure. The Prime Minister ended his talk by stating the importance of partnerships in achieving our goals, and that such consultations play a crucial role in setting the broader economic agenda,” the release.
Finance Minister Nirmala Sitharaman attended the meeting.
The leading economists who participated in the discussion included Arvind Panagariya, Arvind Virmani, Abhay Pethe, Ashok Lahiri, Abheek Barua, Ila Patnaik, KV Kamath, Monika Halan, Rajiv Mantri, Rakesh Mohan, Ravindra Dholakia, Saumya Kanti Ghosh, Shankar Acharya, Shekhar Shah, Sonal Varma and Sunil Jain. (ANI)