On 20th of January 2020, the famous Halwa Ceremony was conducted in the Finance Ministry marking the start of the final leg of the budget process. The ceremony begins with the preparation of Halwa as in our culture, we begin something auspicious by eating sweet food. Nobody knows when this tradition started in Finance Ministry, but it has indeed been a long tradition. The question in our mind is just how auspicious the upcoming budget can be as our expectations seem to be at an all-time high.
Budgets don’t impact as much as they used to in my view as they once did due to the introduction of the Goods and Services Tax. This is precisely why we don’t get much news reports post budgets which dictate how some items will be expensive while others might get cheaper in the coming financial year.
The only tax policies that are of interest for the consumer would be the personal income tax rates or the customs duties. However, the budget as a policy document is indeed critical for the overall macroeconomy and that plays an important role for all of us. It is well recognized that our growth has slowed down from around 8 per cent to 4.5 per cent in the second quarter of the current financial year. Clearly, something went wrong – and even though we debate what went wrong, nearly everyone agrees that this budget could be a great opportunity to fix some of these issues. To be fair, since August we’ve seen the government take positive measures to address the current economic slump and this gives us a sense of optimism that this budget would only carry forward the legacy of these past measures.
Every economist, policy wonk and public policy commentator prepares a wish-list for the budget, including myself. The fact that the budget comes at a time of an economic slowdown makes it an important opportunity to take some of the tough policy decisions that would have been otherwise difficult. The first such decision would be to resist the temptation to increase duties in order to promote domestic industries. The idea may seem appealing, especially politically, but it was practised before 1991 and we saw the monumental failure of Nehruvian import substitution policies. Any temptation to revisit the debate on the need for reduction in import tariffs should be avoided.
India’s exponential growth post-1991 reforms coincided with one of the fastest pace of poverty reduction came with the backdrop of reduced tariffs. The economic argument for this is simple, India imports for the purpose of consumption and therefore, making imports dearer will not automatically make Indian products affordable. Moreover, one has to take a comprehensive view of the overall supply chain.
A hypothetical example could be the situation when products such as cars may be competitive in the international market. However, if we impose a higher tariff on key inputs such as steel or rubber then the automobile industry would have to buy expensive inputs which may make them uncompetitive. Therefore, what is needed is a comprehensive view of trade policy and correct for the inverted duty structures. This along with an indication to further be integrated with global supply chains would be critical in sending a signal to international investors regarding our seriousness to attract these value chains to India. This is absolutely essential as we want to create adequate non-farm employment to absorb surplus labour from the agricultural sector.
The other item that is high on agenda has to do with tax reforms and implementation of the Direct Tax Code which is critical towards simplification of our taxation regime. This would include the removal of Long-Term Capital Gains Tax (LTCG) and rationalization of tax rates and tax slabs. A positive impact of this is on disposable income for taxpayers. Many have argued that tax cuts may not be an as good a strategy as expansion in outlays on infrastructure and programs like MGNREGA. Even though tax cuts will impact a small number of population, but they have a disproportionate share in India’s consumption. This, in turn, is likely to have a multiplier effect on growth rate but more than that, it will revive consumer sentiment and kickstart discretionary consumption.
Of course, all of these measures may imply that we may not meet our fiscal targets but then nobody anticipated us to meet the target for the current financial year. The extent of the slowdown has resulted in a consensus view to deviate from the fiscal target in the coming fiscal year and commit to a credible consolidation path in the medium term. One would definitely like to look at the fiscal numbers for FY2019-20, FY 2020-21 and the medium-term fiscal consolidation path.
This budget will be the first budget of the decade and there are signs of India finally breaking the 8 per cent sustained growth mark in this decade. One hopes that this budget would lay the foundation of such growth. On 20th of January started the final leg of the first Budget of the decade which could, by all means, be a historic budget. Coincidentally, just a few months ago on the 20th of September, history was made by the Hon’ble FM by announcing one of the biggest corporate tax rates in the 21st century. One hopes that the process of making history continues and we have more reasons to be optimistic on the 1st of February 2020.