Priming for a ‘new normal’

Of the diverse array of numbers provided by the Finance Minister in his fourth and probably the penultimate Budget speech before the country goes for the next parliamentary election in 2019, those appearing at the beginning of Part ‘B’ hold the prospect of sparking off some debate, discourse and, hopefully, soul-searching in the days to come. To quote some of the poignant ones:

(i) Although 4.2 crore persons are employed in the organised sector, only 1.74 crore file tax return for salary income.

(ii) The number of persons who report taxable income of ₹10 lakh or more is only 24 lakh

(iii) The number of Indians who travel abroad in a year either on business or leisure is 2 crore.

Budget preparation and presentation in India are no ordinary affair. They involve intensive consultations and homework, political bargaining, traditions, secrecy and even rituals and literary references. Perhaps more by design than accident, budgets are perceived as the most important annual policy announcements that would meet the expectations of one and all. All budgets include measures that are intended to be popular and this one is no exception. But it is not usual for a finance minister to throw a slew of granular data on direct tax collection in his Budget speech and then conclude, perhaps in some despair, that “...we are largely a tax non-compliant society”.

The menace of tax evasion, corrupt practices in political funding, accumulation of ‘black money’ and the consequent preference for cash transactions need no fresh revelation to be comprehended. But the fact that an estimated 97 per cent of the demonetised high-denomination notes were either exchanged or deposited put the government on the back foot in its drive to address this pernicious disease of the Indian body politic.

However, the finance minister has been able to retrieve some of the lost ground by cogently demonstrating that the depositing of demonetised notes followed the same pattern as in tax evasion. Between November 8 and December 30, 2016, deposits in excess of ₹80 lakh were made in 1.48 lakh accounts with average deposit size of ₹3.31 crore! People making such deposits were acting more or less rationally, thinking that this attempt at tax evasion too would have a high chance of success.

While the significant lowering of the tax rates for small firms and personal tax rates for the low-income segment is to cushion the pains of demonetisation, it is not clear whether this will promote tax compliance. The budget is, however, short on measures to revamp the tax administration. As was experienced in the years following the reforms of the early 1990s, lowering of tax rate did not result in a surge in tax compliance keeping with the Laffer principle.

Reforms announced in the Budget in respect of electoral funding can prove to be a game changer for politics as well as for the economy if all major parties eventually rally around these measures. Reducing cash subscription to ₹2,000 is like biting the bullet by the Finance Minister, as this will hurt his party too.

The proposals for the rural and the agricultural sectors are all sensible and well-structured, which should promote equitable growth as well as improvement in the health, education and dwelling standards of the disadvantaged sections of society. Those on the girl child and women could be transformational, provided the emphasis on outcome monitoring becomes a reality.

Increase in the allocation for MNREGA in excess of 25 per cent, though not in congruence with the views of the majority ruling party in pre-2014 days, is a step in the right direction, especially with its stress on rural asset creation through this scheme.

The fiscal situation is more or less on the FRBM trajectory, despite the deficit for 2017-18 being projected a trifle higher at 3.2 per cent. Expansion in capital expenditure by 25.4 per cent is a welcome reversal of the trend observed for the last several years. If the tax collection buoyancy of the recent months is sustained, one can hope to see a better actual deficit number towards the end of the calender year 2017. The current stable macroeconomic condition should also help.

The one major area where the Budget is almost silent is the reform of public sector banks, whose non-performing assets, combined with structured loans, have steadily risen over the last five years to a high of about 15 per cent of gross loans and advances. The fact that these banks have demonstrated very low growth in loans and advances for about two years now raises doubt whether fiscal spending alone will be able to push up the overall GDP growth rate. The so-called ‘Indradhanush’ initiative of the Government has not yielded any tangible result so far.

The criminal probes against some top former bank officials in respect of a high-profile bank loan default case could be a pointer to the possibility of a large-scale misuse of bank funds during 2009-12, taking advantage of lax restructuring guidelines prevailing then.

According to media reports, a day before the Budget, the trading bets put by the bulls on the stock exchanges outstripped those of the bears by a decent margin. The bulls will not be disappointed. It is a good Budget, informed by a clear vision and a plan. It has the potential to build a strong platform for sustainable high growth in the coming years. Also, it can establish what some commentators have called a ‘new normal’ for Indian business and politics, requiring all of us to reorient ourselves to its features and standards.

The writer is a former central banker and consultant to the IMF. Via The Billion Press