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Govt should aim at wider tax base, disinvestment
February, 18th 2016

The Indian economy over the last year, has displayed resilience despite a global slowdown, especially in emerging markets. India’s GDP growth is estimated to be around 7.6% in FY16 despite weak consumer demand and moderate investments. Budget 2016-17, therefore must factor in the evolving trends in India and globally, to strengthen growth of the economy.

In Budget 2015-16, the fiscal deficit (FD) target was relaxed by postponing the FD goal of 3% by a year, to FY18. This fiscal space was used by the government to boost public investment in physical infrastructure in order to compensate for subdued demand conditions.

Significant investments have been made in the road and highways sector, and the power sector without deviating from the FD target of 3.9% for FY16. Despite these steps, the domestic economy continues to face multiple challenges like weak consumer demand, moderation in investments, troubles in the banking sector and decline in exports.

The challenge before the government is to maintain elevated levels of public investment in the face of weak private investment and consumer demand, additional outlay of Rs. 1.1 lakh crore on account of the 7th Pay Commission and OROP recommendations, expected larger state fiscal deficits from the UDAY (Ujwal Discom Assurance Yojana) and low nominal GDP growth; without deviating from the FD target of 3.5% for FY17. Past experiences have proved that excessive government spending is unsustainable, and only erodes credibility of the government and adversely impacts investor and consumer confidence.

What then are the ways that the government can meet the above challenges, without deviating from the path of macroeconomic prudence? The room for elevated government spending on creating social and physical infrastructure can be derived from sources such as disinvestment, improved subsidy management and widening of the tax base thereby reducing the revenue deficit.

The disinvestment target has been missed successively in the last six years. However, in FY17 the government is determined to actively pursue strategic sales in state-run companies. To start with, the government has already expressed its intent to revive the Disinvestment Commission to push strategic sales in state-run companies, thus making it one of the big themes in Budget 2016-17.

While the targeting of LPG subsidy has been successfully implemented through the JAM trinity of Jan Dhan Yojana, Aadhaar and Mobile, subsidy leakages continue in the fertiliser and kerosene industries. The current system of transfer of subsidies to fertilizer plants suffers from major leakages, and has discouraged creation of fresh domestic fertilizer capacity. Budget 2016-17 may consider correcting this through a phased launch of a direct cash transfer of fertiliser subsidies to farmers.

On the revenue front, it is crucial to widen the tax base as well as rationalise tax rates. Increasing the personal income tax base will continue to remain in focus. On the corporate tax end, the government had already announced its plans in the last budget to rationalise incentives in a phased manner and reduce the corporate tax rate to 25% over the next four years. The roadmap and first changes to such rationalisation is eagerly awaited. On the indirect tax front, the government may take steps to align the current tax system to the forthcoming GST by pruning the product and end-use specific exemptions and concessional rates. However, it would do well not to increase the tax rates, in view of weak consumer demand in the economy.

The fiscal space thus generated is expected to be used for creating social and physical infrastructure in both the rural and urban sectors. In the rural sector, to mitigate the adverse impact of two successive droughts as well as improve transport linkages; increased expenditure on roads, irrigation and crop insurance is expected. In the urban sector, investments in the Smart Cities project and in the manufacturing and services sectors, investments in the ‘Make in India’, ‘Digital India’ and “Startup India’ strategies will remain in focus. In the social infrastructure space, education and skill development, healthcare and pensions are expected to get a boost in terms of wider access and improved outcomes.

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