Some Pointers For The Union Budget From Dr Ajit Ranade

Some Pointers For The Union Budget From Dr Ajit Ranade

The budget should signal continuity of economic reforms and a path toward fiscal consolidation

Ajit RanadeUpdated: Tuesday, January 23, 2024, 04:40 AM IST
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The union budget for the financial year 2024-25 will be presented in Parliament by the Finance Minister on February 1. This budget proposal will apply for the period April 1, 2024, to March 31 2025. Since the elections to the 18th Lok Sabha are due in the next five months, the FM will present only an interim budget, and it will be passed by a vote on account. What this means is that the present government cannot announce major initiatives which have potential electoral benefits for the incumbent government. The government also cannot pledge major new expenditures, which will become the responsibility of the next government to fulfil. Hence the February budget speech is expected to be mostly about items which are inevitable and routine expenditure items, and will also have revenue estimates based on linear extrapolation. We should not expect any big bang reforms or large welfare freebies.

Even then it cannot be forgotten that this is the annual budget presentation to the nation, an economy soon to be the third largest in the world. The budget proposals can and should contain announcements which can push the reform process ahead, even if keeping the restraint on electoral populism and also not excessively burdening the incoming government. This is the continuity of the reform process that we have seen for the past 34 years.

So here are some pointers as suggestion to the Finance Minister for the interim budget.

The first is about income tax exemption. The obligation to pay even a single rupee of income tax kicks in only when your minimum income is above 7.5 lakh. This income is 300% of the per capita income of India, which is the average income of every man, woman and child. No other country gives an income tax exemption limit which is so high. Hence the FM is well advised to resist increasing this limit further. This high exemption limit means that India’s income tax to GDP ratio is quite low. It also means that the increased burden is on collecting taxes via indirect tax like Goods and Services Tax (GST). Indirect taxes are unfair. Since GST is paid by all, whether rich and poor, the burden falls disproportionately on the poor. We need to reduce the median GST rate from 18 to 12%. And we can do that only if we collect more direct taxes such as income tax. India’s high exemption limit of 7.5 lakh is also misleading. Because by the time your income crosses 15 lakh you pay the highest marginal tax rate of nearly 42%. Which means that our marginal tax rate on income goes from zero to 42 in just 7.5 lakh income. A healthier structure should be like this: zero income tax till first 2.5 lakh income, 10% tax for income between 2.5 to 7.5, 20% tax between 7.5 to 25 lakh, 30% from 25 to 50 lakh and a higher rate above 50 lakh. The total tax collected might actually go up if we switch to this structure. Of course, we will need to collect empirical data to confirm this.

A second point for the FM to note is about fiscal consolidation. The fiscal deficit is about 5 to 6% of the GDP. This keeps adding to the debt mountain which is at 82% of the GDP. This high appetite for borrowing by the government leaves less room for credit and loans to be available for others. India’s debt to GDP ratio is stuck around 80%-plus, and the IMF says it might reach 100% if not checked. Look at Jamaica. It has reduced its debt to GDP ratio from 140% to 72% in the past fifteen years. That is cut by half. Surely India can go from 82% to 60%, as recommended by various committees appointed on fiscal responsibility. Of the targeted ratio of 60%, the union government’s share is 40 and the states’ share is 20. For this to happen the fiscal deficit must be kept in check. Caving in to populist demands like the Old Pension Scheme will be fiscally disastrous and also unfair to the large workforce without any social security.

The third point is about farmers’ incomes. This was supposed to double by 2022 or 2023. It has not happened. One of the reasons for this, is that farm prices are not allowed to increase. Whenever agricultural prices of commodities like sugar, rice or onions shoot up, the union government arbitrarily imposes export bans. So, farmers are unable to exploit the opportunities to make some healthy windfall profits. The government’s ban on food items is due to concerns about an urban backlash. The urban consumers’ inflation pain is more important than the pain to farmers losing out on export profits. This also holds good for milk pricing which is heavily controlled. The union budget should acknowledge this urban bias in agricultural policies and let go of the knee-jerk reactions concerning export bans. The budget can also bless forward and derivatives markets in agricultural commodities.

A fourth suggestion relates to the education sector. The higher education sector badly needs massive funding to expand research, fill in vacancies for teachers, and increase student intake and scholarship amounts. All of this cannot be done only with government funds. To enable a greater flow of private funds into education, all higher education institutions, or those which meet a certain criteria of quality, age and scale can be given free access to foreign funding. If we welcome foreign direct investment (FDI) in all sectors including defence, why is the education sector so over-regulated when it comes to receiving foreign funds? Can FCRA permission be made very liberal for educational institutions? This is worth exploring and can feature in the FM’s proposals.

These are a few ideas to table in Parliament on February 1. The budget’s size is about 15% of the national GDP (in nominal rupee terms). It is being presented just before the formation of the next Lok Sabha, which will oversee major initiatives like the next census and delimitation. Even then, it should signal continuity of economic reforms and a path toward fiscal consolidation.

Dr Ajit Ranade is a noted Pune-based economist. Syndicate: The Billion Press (email: editor@thebillionpress.org)

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