Yet another Union Budget presentation is upon us. Our Constitution does not allow even a single penny to be spent by the government unless approved by the people’s representatives. Hence, we have the elaborate process of preparation, presentation and eventual passage of budget proposals. However, as we have a parliamentary democracy, where parties have to vote according to their whip, in a House with an absolute majority for the ruling party, this budget’s passage would be a mere formality. Even then, it does not mean a free pass. The government cannot be so maverick in its proposals that it upsets too many constituencies. After all, members of the Lok Sabha do have to go back to the people to get re-elected. This is true even if nearly half of the newly elected members are first timers, and the other half may not come back. Even if the government enjoys a thumping mandate and has a rich trove of political capital, the compulsions of accountability and impending elections mean that every budget is largely an act of continuity, not radical change. This is true for two more reasons. First, we don’t do zero-based budgeting, which means starting each item from scratch. Most budgeting heads, whether on the revenue or expenditure side, are increments on the previous year’s numbers or tweaks of revised estimates. Sometimes the increments are large because estimates go horribly wrong, but they are increments nevertheless. The second reason is more mundane: There is very little room for manoeuvre. The fiscal free space that is not already pre-empted is limited. For instance, a large part on the expenditure side is “spoken for". Just the interest payable on the debt mountain of the central government is nearly the size of the fiscal deficit. There is nothing that can be done about it. If you add non-discretionary obligations, such as salaries, pensions, food and fertilizer subsidies, there is not much room left. No wonder, come March, the items that get savagely slashed to meet the pre-announced fiscal deficit target are capital expense items that can be postponed. Capital expenditure suffers because operational expenses eat up so much. As for revenues, because of the goods and services tax (GST), whose rates are decided by the GST Council, there is little independent space for the Union government on indirect taxes. On direct taxes, some experimentation is possible, though the populist demand is for tax rates to go down. Rare (or crazy) is the taxpayer who calls for higher taxes. But here, the budget makers may pay heed to the Prime Minister’s clarion call to Indian taxmen to widen the tax net to 100 million taxpayers. We can’t widen that net if we let wholesale numbers out of it, as was done in February’s interim budget. Finally, since this is a July budget, it affects only about half the fiscal year, so continuity is the mantra to be followed. In some ways, it is like batting in cricket to score shots, so long as they are narrowly between mid-on and mid-off. No hooks or risky swings are allowed.
Given the overall constraints on feasibly radical changes, here are some specific suggestions that are implementable. First, do not roll back the long-term capital gains (LTCG) tax. This is a hard fought victory, made possible by an amendment of the three-decade-old Mauritius treaty. It is a form of direct tax. India’s tax is too skewed toward indirect taxes (and GST makes it even more so), so the LTCG tax must remain. Ultimately, all income should be taxed uniformly and fairly, no matter what its source. That’s the holy grail.
Second, as India’s financial savings rate is falling, the government may do well to further incentivize sovereign gold bonds. They should be sold on tap, daily, at a wide range of outlets, with a brand ambassador telling investors that it is just like, and indeed identical to, investing in gold. At present, sales are periodic, indifferent, and only take place at a few outlets. Perhaps finance minister Nirmala Sitharaman should consider engaging Amitabh Bachchan to sell gold bonds for the government.
Third, the coal cess, christened first as “green energy cess" and then rechristened as “GST compensation cess", needs to be slashed if not removed. India already has a de-facto carbon tax of about $15 per tonne of carbon. We don’t need to be holier than the rest in our campaign for renewable energy. Coal is a strategic asset and we have made it more expensive than its international price with all the extra domestic taxation and renewable purchase obligations. It went from zero to ₹400 a tonne in about five years and contributes to a competitive disadvantage for power generators and industrial users.
Lastly, a suggestion for the Insolvency and Bankruptcy Code (IBC) folks. The IBC is turning out to be a liquidation forum and not what it was meant to be—for restructuring and resolution. The tax treatment on “haircuts" offered by lenders and creditors should not attract the taxman’s glad eye. These are treated as windfall gains to beleaguered borrowers, and attract all kinds of taxes, including Minimum Alternate Tax. Such a tax burden scares away genuine bidders and chances of restructuring or auctioning diminish, leading to the last option of liquidation. The taxman should do his bit for the success of IBC. These are but four of myriad suggestions that are sure to pour into the finance ministry. Best wishes for 5 July.
Ajit Ranade is an economist and a senior fellow at the Takshashila Institution.