The bestselling seminal book ‘Built to Last’ astutely highlighted a singular and fruitful attribute of visionary companies: that they consciously escape the ‘tyranny of the OR’ i.e. the perfunctory rational view that you can either have A or B, but not both. The book’s impeccable argument showed us how visionary companies never make a conflicting choice like ‘either Stability or Progress’, instead they embrace the ‘genius of the AND’, the paradoxical view that allows them to pursue both A and B at the same time.
At a time when the economic scenario is being furiously debated, conventional wisdom may incline the decision maker to making a choice like ‘either Growth or Fiscal consolidation’, but notwithstanding the tough task at hand, a truly visionary leadership will need to pursue both growth and fiscal consolidation simultaneously.
First and foremost, the accounts need major qualitative corrections and adjustments. As the first step, there’s an immediate need to accurately gauge the income by taxes, as tax revenue accounts for as much as 85% of the governmental income. This accurate information would essentially give the government a true and fair idea of the spend capacity, based on which they can decide their comfort levels of spending, in line with their priorities. Any shortfall then can be effectively met through asset sale. On this front, I expect tax revenue projection to be cut by at least Rs35,000 crore - growth lowered by 2.5 percentage points and 3.5 percentage points in direct and indirect taxes respectively, compared to interim Budget figures.
The next point on the agenda should be Plan expenditure increase, particularly the gross budgetary support to revive the economy. Plan expenditure has been severely cut down in the past two years and stands at a mere 30% of total expenditure. Infrastructure development clearly needs to be taken up on priority and the government should aim at swelling the said spend to 2% of GDP from 1.7% currently.
The consensus view is that the Budget should cut back on non-Plan expenditure. The government can’t afford to waste this opportunity and will have to walk the talk. Tough measures are best taken now. Once economic situation improves, any bitter pill administered will be forgotten and forgiven towards the end of the present dispensation.
The government may want to continue spend on non-Plan capital expenditure like Defence, so bulk of the reduction will have to come in through a drop in petroleum subsidy – in the form of hike in diesel, kerosene and LPG prices. Subsidies account for 16.1% of total expenditure sans adjusting for roll-overs. There is also a strong case for cutting food subsidy and other wasteful schemes like MNREGA.
Yet, even after accounting for the adjustment – higher gross budgetary support and lower subsidies - I don’t expect total expenditure to be any less than that projected in the interim Budget. Having said that, realignment of the expenditure Budget should definitely improve the quality of spending. Clearly, the only option is to boost revenue through disinvestment, sale of SU-UTI shares, revenue from coal block allocations, NELP and telecom auctions. Non-tax revenue projections are likely to be a lot higher than those envisaged in the interim Budget.
In taking the above measures, it won’t really matter if the Finance minister hits or misses the fiscal deficit target of 4.1% by a couple of hundred basis points on either side. What would matter is only whether he sets the house in order and takes steps in the right direction.
On the personal taxation front, key announcements should include both increase in basic exemption limit and additional deduction under Sec 80C and not merely one of the two. There is a glaring need to boost financial savings and provide some relief for negative real returns in the economy. A sincere attempt needs to be made to widen the personal income tax net.
Other steps could include attracting foreign funds through the postponement of GAAR, putting a decisive full stop on retrospective taxation, opening up FDI across different sectors and simplifying and facilitating administration of transfer pricing provisions. The FM can also rope in sovereign funds, IFC and the like for infrastructure funding.
The central Budget, the world over, is meant to be an aggregation of accounts, more of an arithmetic exercise really. But in India it is nothing short of a mega event, an annual affair drawing undivided attention of people across spheres and strata. The government should gainfully exploit this potent platform to send out a strong message because sentiment often soars higher than situations. If sentiment picks up before the economy does, money will flow into the economy thereby engineering a faster recovery. What we seek from the FM is thus a crystal clear roadmap to recovery, addressing supply side constraints for agriculture, PSU recapitalizing, manufacturing boost, export promotion and GST timeline.
Beyond doubt, drastic steps are critical to Mr. Jaitley’s maiden Budget and let them not be half-hearted. The next year’s Budget could then be effectively used to review the year gone by and move forward with even more aggression.
This is not the time to bother about market corrections and populist measures. The FM’s innings has just about begun. Let it be ‘Built to Last’!
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