Budget will boost growth, provided budgeted capex materialises

Finance Minister Nirmala Sitharaman has come up with a Budget that did not deserve a thumbs down from the Nifty, which ended the day’s trading 0.26% lower. This was more on account of the troubles of the Adani Group and, by association, of public sector banks with exposure to the group.

The big boost to capital expenditure — including grants in the aid of capital expenditure; the increase in capex is Rs 3.2 lakh crore, to Rs 13.7 lakh crore — is welcome and suggests that the Budget is pro-growth. That pro-growth glow loses some sheen when we take into account the total size of the Budget. It has come down from 16% of GDP in 2021-22 to 15.3% of GDP in 2022-23 and is slated to fall further to 14.9% next fiscal. This reflects the longstanding inability of the system to significantly increase the share of taxes in GDP — the only way to raise total expenditure is to borrow, which means that fiscal correction also brings down the size of total spending.

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That said, it is welcome that the government has not caved in to pressure from fiscal deficit hawks, who would prefer swift compression of the fiscal deficit to the 3% of GDP level deemed, quite arbitrarily, to be the badge of fiscal responsibility. As long as the nominal growth rate of the economy exceeds the nominal rate of interest, that is, the additional output arising from investment of borrowed funds leaves a surplus after paying for the cost of borrowing, such borrowing does more good than harm.

Conservative tax target

The government has been conservative in the economic growth rate it assumes for estimating tax collections. It assumes a growth rate of 10.5%, precisely the rate of increase in corporate and income taxes. It expects a marginally lower rate of growth of indirect taxes, which is welcome: indirect taxes command a larger proportion of the income of poor consumers, as compared to the income of rich consumers. The excise duty on a litre of petrol is significantly higher than a proportion of the income of a delivery worker than of the income of someone whose passion is driving an SUV off-road. The Centre’s total tax revenues are slated to decline marginally from 11.143% of GDP to 11.138% of GDP. Direct taxes are 55% of the Centre’s total tax take and indirect taxes, 45%. Before the onset of economic reforms, indirect taxes were 80% of tax collections.

Why is this tax target conservative? The rate of growth of forecast by the Economic Survey is 12.3% — real growth of 6.5% and inflation of 5.8%. By assuming a lower nominal growth rate, the Budget leaves a cushion for meeting fiscal targets next year. Furthermore, given the rising levels of compliance in GST, tax buoyancy should rise. A diligent follow-up of the audit trails generated by GST can lead to not just greater GST collections but also greater income tax collections. GST is a value-added tax. Suppose a company pays Rs 180 crore of GST a year, at a GST rate of 18%. That means the company has added value to the tune of Rs 1,000 crore. Gross value added is the sum of gross profits and wages and salaries. Now, the company can try all kinds of accounting tricks to lower its taxable profits and employee compensation, but it cannot escape the fact that gross profits and employee compensation have to add up to gross value added.

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Less protected economy

Another seeming positive for the Budget is that it proposes to make the economy a shade less protected than in 2021-22: the share of customs duties as a proportion of GDP was 0.84% that year; it came down to 0.77% in 2022-23 and is slated to stay at that level in 2023-24.

The government continues to labour under the misapprehension that India’s domestic manufacturing and export performance would get a boost from selective customs duty concession on components while jacking up the duty on finished goods. This strategy only leads to massive imports of components and inhibits their domestic manufacture. Lithium-ion battery cells get a duty concession this year while the goal is to foster their local manufacture this year. The sensible policy on protection is to offer the self-same uniform, low rate of protection to all lines of value addition. This would leave investment decisions to manufacturing competitiveness, rather than to lobbying power in the finance ministry. The decision to retain the high import duty on gold and to raise the excise duty on cigarettes would lead to increased smuggling of these products, fostering crime and feeding revenue leakage.

Rationalization of income tax rates

The government’s rationalization of income tax rates and slabs aims to encourage new tax filers to adopt the exemption-free regime introduced in the 2020 Budget. This makes sense. Those with incomes up to Rs 15 lakh a year stand to benefit from the new tax regime. Those who used to pay income tax at the highest rate of 42.7% have been offered a reduction in their tax burden.

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In addition, the Budget indulges this government’s addiction to programmes with cutesy acronyms, mostly prefixed with the words Pradhan Mantri, adding several more to the existing supply. Perhaps, it is time to move away from announcing ever new programmes to focus on implementing the ones already announced.

It is possible to recognize mistakes and abandon them, in the interest of good governance. As the present government celebrates India’s digital governance infrastructure, it is worth recalling how the foundation of these digital innovations, Aadhaar, had been vehemently opposed by incumbent prime minister in his capacity as chief minister.

(TK Arun is a senior journalist based in Delhi)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)