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Budget 2018 must avoid the temptation to bolster government revenues myopically
January, 05th 2018

A common thread running through the high economic growth phases of different countries is that the regulatory regime has been relatively stable. This has provided economic agents with the necessary comfort to take risks and reap rewards. On the eve of Modi government’s last full budget, this lesson should not be forgotten. We have had a disruptive year which included two eagerly awaited reforms: GST and an insolvency code. With the economy still adjusting to these far reaching changes, 2018’s budget must avoid any more disruptions and focus on consolidation.

The worry is that with changes in most indirect taxes out of the control of the Centre following transition to GST, where revenue collection has been below expectation, government will tinker with direct taxes to offset the transition challenges. But the last thing the economy needs at this point is tax increases myopically aimed at bolstering government revenue. For instance, ideas such as an introduction of long-term capital gains tax on stock investments must be rejected. As it is India remains a difficult place to do business, so discouraging investments even more would be quite foolhardy. No wonder even rumours about the introduction of a long-term capital gains tax, mainly to compensate for the sag in GST collections, spook the Sensex.

The need to preserve stability also extends to fiscal policy, which represents government strategy to use taxation and spending to influence the economy. At this stage the primary aim on the spending side should be restraint. Gradual narrowing of fiscal deficit over the last few years has been an important contributor to macroeconomic stability. This gain must not be frittered away.

CAG reports have repeatedly shown that even when government raises resources through multiple routes to address specific needs, taxing citizens for years for specific programmes, there is little to show the money has reached its destination. For example while Rs 83,497 crore was collected as secondary and higher education cess during 2006-07 to 2016-17, schemes on which the cess proceeds were to be spent were not identified, even a designated fund was not opened in the public account. Fact is that it’s possible to have a more meaningful impact on the economy even with the current level of resources. That should be the area earmarked for attention. Be a more efficient government.

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