2019 has been a year when the economy went through various phases of
economic swings and by now it has been accepted that there is a slowdown in the
economy. The emphasis so far has been on monetary policy where the MPC has
carefully deliberated the situation and lowered the repo rate by 135 bps. This
was good from the supply side where the attempt was to make the cost of capital
lower for industry. But with the problem being largely on the demand side, the
impact tended to be limited. There has ..
The FM has been proactive in terms of addressing sector-specific
issues so far. With the Budget coming up, there is scope for enhancing the
effectiveness of fiscal policy to revive growth. In the last few months the FM
had lowered the corporate tax rate which was to give a boost to corporate
profits which in turn should set the stage for higher investment and growth.
While it is too early to judge the efficacy of this measure, it was observed
that most companies took advantage of the lower tax rate
but have not yet invested the same. There is speculation that companies
may be using the same to pre-pay debt or enhance dividend in difficult
times to keep up investor sentiment. Clearly, something more direct is
required to ensure that spending takes place.
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The Budget will be presented at a time when there is uncertainty on
revenue collections for FY20 leading to fiscal slippage. If the goal is to use
this opportunity to focus entirely on growth, what should the FM do?
The first measure is ideological wherein the government should skip
the fiscal path of prudence and make a more realistic budget that focusses
single-mindedly on growth. Therefore, the fiscal deficit ratio should not be
the starting point of the exercise (which it is today, as all other numbers are
decided based on this end-ratio). This will mean that it should not be a compromise
number of being within the 3-3.5% mark but a bold measure that keeps the number
1% higher than the deficit in 2019-20.
Second, the extra money that will come from the enhanced fiscal
deficit has to be accounted for by higher expenditure and/or lower tax rates.
This will be a delicate call to take. One option is to channel the entire
amount into capex which will enhance the outlay from Rs 3.4 lakh crore (FY20-B)
to Rs 5.4 lakh crore and directly add to demand for other products of
industries like cement, steel, machinery, etc. These backward linkages built by
higher outlays in roads, railways and urban development ..
. The alternative is to balance the same across tax cuts and
expenditure. With corporate tax already being rationalised, there is a strong
case for lowering of income tax rates in such a way that there is more spending
power. The focus of the government so far has been on providing sops at the
lower level of the income scale. But this will not be adequate as the spending
power at the lower levels tends to be limited — especially when inflation,
especially food inflation, is rising. Even at the cost of providing benefits to
the higher income groups, sops at this end would work to revive demand as
benefits on, say, capital gains can help to channel demand into high-end goods
such as housing and automobiles.
Third, the PM-Kisan Scheme is a well-constructed one which provides
Rs 500/month to every family. This amount has to increase to have an impact as
the present amount is too small to make a difference. While it was a good pilot
to begin with, it needs to be substantial to make a difference. Probably, some
of the social schemes that are not really delivering results can be abandoned
based on government audit and the money given directly to the poor so that
their spending ability improves.
Fourth, the disinvestment calendar has to be stated at the time of
the Budget so that it does not hang in abeyance for the entire year, which has
been the case till now. It is a very useful source of revenue as there is potential
to get Rs 1 lakh crore every year which can be used to shore up the budget or
even better, be used to earmark specific capital expenditures. As there is a
lot of reluctance to sell such assets, the plan should be stated upfront in the
Budget and the timeline provided so that the exercise becomes a reality.
The FM has already announced measures to ease the tax system in terms of processes and procedures as well refunds and tax credits which hopefully should make things easy for all tax payers. As most of the policies for various sectors have been announced, the Budget can concentrate on this single goal of reviving economy through spending in the most efficient manner. It will mean some trade-offs in the sense that there can be a tilt towards the higher income groups, but may be necessary to make to make the engine fire. It should be remembered that a high outlay spread across a wide mass of people — though egalitarian and necessary during normal times — cannot deliver results in tough times. Hence it has to be concentrated in areas where spending power resides.
The FM has already announced measures to ease the tax system in terms of processes and procedures as well refunds and tax credits which hopefully should make things easy for all tax payers. As most of the policies for various sectors have been announced, the Budget can concentrate on this single goal of reviving economy through spending in the most efficient manner. It will mean some trade-offs in the sense that there can be a tilt towards the higher income groups, but may be necessary to make to make the engine fire. It should be remembered that a high outlay spread across a wide mass of people — though egalitarian and necessary during normal times — cannot deliver results in tough times. Hence it has to be concentrated in areas where spending power resides.
In this context too, the GST framework needs to be revisited. First,
if price transmission has not taken place, the same needs to be brought forward
to the authorities. Second, the relationship between price and demand should be
studied closely and tax rates adjusted in the next round of meetings. Rather
than changing rates based on the level of affluence, it should be based on
elasticity of demand to ensure that the tax revenue actually increases.
In short, if the Budget has to succeed in reviving growth, the focus
should be on spending with some compromise on the fiscal ratios. In a way it
will be a fiscal holiday, but it's worth a try nevertheless.2019
has been a year when the economy went through various phases of
economic swings and by now it has been accepted that there is a slowdown
in the economy. The emphasis so far has been on monetary policy where
the MPC has carefully deliberated the situation and lowered the repo
rate by 135 bps. This was good from the supply side where the attempt
was to make the cost of capital lower for industry. But with the problem
being largely on the demand side, the impact tended to be limited.
There has ..
Read more at:
https://economictimes.indiatimes.com/news/economy/policy/budget-2020-how-to-make-things-work-this-time-spend-spend-spend/articleshow/73265269.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst2019
has been a year when the economy went through various phases of
economic swings and by now it has been accepted that there is a slowdown
in the economy. The emphasis so far has been on monetary policy where
the MPC has carefully deliberated the situation and lowered the repo
rate by 135 bps. This was good from the supply side where the attempt
was to make the cost of capital lower for industry. But with the problem
being largely on the demand side, the impact tended to be limited.
There has ..
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