High time to prioritise non-tax revenue in the Budget
January, 17th 2018
Budget-making is difficult at the best of times. So many demands, so few sources of income. For GoI, the need to raise revenues with a tightening fiscal policy — increasing taxes — is counterproductive, while cutting expenditure will slow down growth and investments.
Essentially, GoI has three sources of revenues: direct taxes, indirect taxes and non-tax revenues. For this year, the indirect taxes will play a much smaller role since it will be the GST Council that will be deciding indirect taxes, with the finance minister working with direct taxes and nontax revenues.
Rising oil prices and non-existent private sector investments make this year especially challenging. GoI has to proactively push the envelope in terms of capex and other expenditures. Non-defence capital expenditure over the last 10 years has grown by a compound annual growth rate (CAGR) of less than 10%.
Last year saw a healthy growth in capex and GoI must continue the momentum this year. Not only will this help boost the economy, but it will also drive a crowding-in effect for private sector investment. However, any increase in expenditure has to be countervailed by a proportionate increase in government revenues. Failure to do so could offset the fiscal deficit balance.
On the tax side, GoI introduced GST. Once its teething problems smoothen out, tax collections will rise further. Raising direct taxes to generate higher revenues, however, can be counterproductive. A rise will further slow private expenditure down, forcing GoI to spend more. This could lead to a vicious cycle of higher taxes and overdependence on government spending. Instead, why not aggressively push for a rise in nontax revenues?
Non-tax revenues as a percentage of total revenues have been budgeted at around 23% this year, lower than the 26% and 25% in 2017 and 2016 respectively. There is also a high chance that the actual number may be even lower. In fact, we have achieved less than 90% of our budgeted target for non-tax revenues in three of the last six years. This lack of predictability creates problems for GoI as it necessitates cost-cutting or increasing taxes to maintain the fiscal deficit target.
It's high time we accord non-tax revenues the priority they deserve. A structured, long-term plan will not only outline the course of action but also help provide predictability to the earnings from non-tax revenues. The huge response to the Bharat 22 exchange-traded fund (ETF) this year proved that non-tax revenues can yield wonderful results if implemented in a thoughtful manner.
The most important vector in this will be the monetisation of government assets: real estate, telecom spectrum and equity stake in different PSUs. This selling of assets is an investment for the future, which needs to be done through a structure that maximises value for GoI. A possible fund, on the lines of sovereign wealth funds, can be considered. It could then monetise these assets, while simultaneously investing in areas to generate investment returns.
Such a fund could also enter into public-private partnerships (PPPs) for large public sector investments, including bank recapitalisation, infrastructure projects and social investing. Such ventures could help direct investment into capital-intensive projects without requiring explicit GoI funding. GoI can mandate a minimum target inflow from the fund towards the government every year to ensure its revenue requirements are met.
Various ministries, like transportation and railways, have recently announced that they will monetise their assets and will not have to rely solely on budgetary support for their investments. Similarly, GoI should plan to auction property assets to raise money. It also has access to sources such as unclaimed dividends and deposits. A list of options and modes of raising non-tax revenues could be made, along with a well-thought-out long-term plan for raising resources from these sources.
GoI has done well to implement taxside reforms in the form of GST that will enhance the tax revenues in the long term. A similar reforms-oriented approach towards non-tax revenues can help it do a better job at balancing the fiscal deficit and public expenditure, ensuring that the growth momentum is not lost.