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Saturday, December 14, 2019

Finance Ministry could have been bolder. But budget is heavy on vision and inclusive growth

Nirmala Sitharaman’s budget speech was what budget speeches ought to be. A vision statement of what the government plans to do. She set the tone of her speech in an honest and direct manner.

Written by Surjit S Bhalla | Updated: July 6, 2019 9:45:53 am
Nirmala sitharaman, union budget 2019, budget 2019, finance ministry, indian express, express opinion Union Minister for Finance Nirmala Sitharaman. (Express Photo: Prem Nath Pandey)

Budgets used to be an accounting statement — and finance ministers indulged their favourite industrialists to reveal who was favoured and who was not. Excise taxes went up for those the FMs wanted to punish, and down for those they wanted to encourage. Then came GST. Now 18 months old, and with the GST Council making all the decisions, there is precious little for the FM to do on indirect taxes. We await the finalisation of the direct tax code. Until then, the Union Budget can tinker around (this time more than tinker) with corporate and individual tax rates. The good news is that the corporate tax rate was reduced from 30 per cent to 25 per cent for all but 0.7 per cent of firms. Why not all firms is a question everybody is asking.

And then, there was the tinkering with income taxes and surcharges on the super-rich. Call it a (unsuccessful) balancing act to reduce corporate tax rate or a pointer to the fact that tax authorities still have not graduated from their “increase tax rate and get lower tax revenue” axiom of the Indira Gandhi era. So, bowing to Thomas Piketty, the tax rate for the super-rich was increased, via an increase in the surcharge to near 40 per cent, a rate last observed before the dream tax budget of 1997.

How much extra tax revenue would the Ministry of Finance get from this exercise? Don’t ask embarrassing questions, but likely the same amount they got from imposing the long-term capital gains tax — that is, a tax loss rather than a tax gain. Why? Because tax avoidance (a favourite Indian habit) creeps in and absolutely fewer super-rich people will accurately report their super-rich incomes. And given that the highest corporate tax rate is 28 per cent (25+3 per cent surcharge), there will now be a 12 ppt gap between the corporate tax rate and the rate for rich individuals — likely to be the largest such gap observed in the world today. A very predictable consequence is individual incomes will go down, corporate incomes will go up and total direct tax collection will come down. This underlies the urgency of reaching a direct tax code so the FM’s hands are tied (like they are for indirect taxes). So this budget may be the last one for the tinkering of direct taxes.

But all is not lost for those wanting to “intervene”. The budget of the future, likely next year, will be one where the only tax rates tinkered with will be custom duties. For example, the present budget imposed a 5 per cent custom duties on imported books. Most of us want to believe that such purchases should be subsidised, especially since the budget (correctly) laid emphasis on education and the National Research Foundation. The total value of imported books (children picture books, etc, harmonised code of 4901) in 2018-19 was $154 million or 0.03 per cent of total imports. At 5 per cent tax rate that will yield a tax revenue of Rs 54 crore.

But that is where the bad news ends. Besides these guffaws (and maybe a few others I missed), Nirmala Sitharaman’s budget speech was what budget speeches ought to be. A vision statement of what the government plans to do. She set the tone of her speech in an honest and direct manner. She was presenting the budget because the BJP had achieved an overwhelming mandate. She emphasised the build-up of the foundation of equality — infrastructure, water, sanitation, housing, power, roads — and women empowerment. The provision of these public goods are the essence of good governance — and what inclusive growth is all about.

Future budgets should be like this — no longer an accounting statement, like past budgets. Accounting should be left to accountants, or accounting economists. Thankfully, the FM presented the fiscal deficit as an afterthought — at 3.3 per cent for 2019-20, down marginally from the interim budget estimate of 3.4 per cent. The implied nominal GDP for 2019-20 is a 12 per cent increase over 2018-19. Even if nominal growth is 11 per cent, this would mean that the fiscal deficit will be at the originally budgeted 3.4 per cent. Revenues are budgeted to increase by 13.5 per cent — even with slippage on both revenues and GDP, the likely fiscal deficit will be 3.5 per cent of GDP. Finally, and thankfully, such small differences in fiscal deficits are not only not a talking point, but, at best, a footnote.
We await the future, perhaps as early as February 2020. One can’t expect a budget to be a perfect statement of intent and vision. But Sitharaman’s premier budget statement is a good start.

This article first appeared in the print edition on July 6, 2019 under the title ‘She (almost) conquered’. The writer is contributing editor, The Indian Express. Views are personal.

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