3 things FM should do

Pointers for the Union Budget

The Union budget for 2024-25 will be presented in parliament by Finance Minister Nirmala Sitharaman on February 1. Since elections to the 18th Lok Sabha are due in April-May, 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 that 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, while keeping the restraint on electoral populism and 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 suggestions 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 Rs 7.5 lakh. This income is 300 per cent 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 GST. Indirect taxes are unfair. Since GST is paid by all, whether rich or poor, the burden falls disproportionately on the poor. We need to reduce the median GST rate from 18 per cent to 12 per cent. And we can do that only if we collect more direct taxes such as income tax.

The high exemption limit of Rs 7.5 lakh is also misleading, because by the time your income crosses Rs 15 lakh, you pay the highest marginal tax rate of nearly 42 per cent. Which means that our marginal tax rate on in-come goes from zero to 42 per cent in just Rs 7.5 lakh income.

A healthier structure should be like this: zero income tax till first Rs 2.5 lakh income, 10 per cent tax for income between Rs 2.5 lakh to Rs 7.5 lakh, 20 per cent tax between Rs 7.5 lakh to Rs 25 lakh, 30 per cent from Rs 25 lakh to Rs 50 lakh, and a higher rate above Rs 50 lakh income. 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 5-6 per cent of GDP. This keeps adding to the debt mountain, which is at 82 per cent of 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 per cent-plus, and the IMF says it might reach 100 per cent if not checked.

Look at Jamaica. It has reduced its debt- to-GDP ratio from 140 per cent to 72 per cent in the past 15 years. That is, it cut it by half. Surely, India can go from 82 per cent to 60 per cent, as recommended by various committees appointed on fiscal responsibility.

Of the targeted ratio of 60 per cent, the Union government’s share is 40 per cent and the states’ share is 20 per cent. 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 exporting food items is due to concern about an urban backlash. The urban consumers’ inflation pain is more important than the pain of 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, 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 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 GDP (in nominal rupee terms). It is being presented just before the formation of the next Lok Sabha, which will over-see major initiatives like the next census and delimitation. Even then, it should signal continuity of economic reforms and a path toward fiscal consolidation.

(The writer is a noted Pune-based economist) (Syndicate: The Billion Press)