Economy

Budget 2020: Income tax cut to hurt revenue, govt should opt for DBT to back the poor

Updated : January 30, 2020 07:13 AM IST

Works under MNREGA should focus on labour intensive activities like water harvesting which will also improve land productivity.

Food subsidies need to be reduced by bringing down the stocks held by the FCI which are way above the required limits.

The budget for the financial year 2020-21 is being presented in the backdrop of gloomy economic numbers. The main levers of growth namely private consumption, private investment and exports are spluttering. Whatever growth is taking place is because of high public investment. But this cannot go on indefinitely given the fiscal constraints.

The way out therefore is to boost private investment by fixing the financial system to facilitate more lending by lowering the lending rates and also by boosting private consumption as both go hand in hand. Fixing the financial system will take time but some steps need to be taken immediately. This should include government guarantees for lending to financially strong NBFCs and a thorough quality review of the NBFCs (consequent to the IL&FS fiasco) and also a second-round review of the commercial banks given their own lending to the NBFCs post demonetisation. This must be accompanied by other measures like further capitalisation of the banks and the creation of a strong regulatory regime for the NBFCs by the RBI. This will slowly lift the gloom around credit pessimism.

On the private consumption front, reduction in personal income tax rates may not be the ideal way as it may weaken the revenue situation without really benefitting the poor. Already the income tax exemption threshold is way above the median income. The way to go would be to use Directs Benefit Transfer mode to make income transfers to the farmers. For the agricultural workers, allocation to MNREGA needs to be increased. Works under MNREGA should focus on labor-intensive activities like water harvesting which will also improve land productivity.

Need to reduce fertiliser subsidies

Minimum wages should also be increased. To release resources for this, the fertiliser subsidies need to be replaced by direct transfer to the farmers and also food subsidies need to be reduced by bringing down the stocks held by the FCI which are way above the required limits (75 million tonnes now against a requirement of 35 million tonnes).

Exports are crucial to economic growth. Past history shows that no country in the post-World War II era has grown at more than 7 present without double-digit export growth. To remedy this, the government should look at Arvind Panagriya’s proposal for creating coastal export enclaves at ports especially through a cluster approach of textile, leather and food processing industry. In these enclaves, labour and land regulation could be relaxed.

Finally, to boost productivity levels we need to look at structural reform. The reforms of the 1990s addressed the product markets but left the factor markets untouched. Our suggestion is that the GST rate regime could be used to reform the land and energy market by bringing both electricity and real estate under the GST. The first measure would help in lowering energy tariffs by helping pass through embedded input credits upstream. Tariff rationalisation should be done which should reduce cross subsidisation of consumer tariffs by industrial tariffs. Richer consumers must subsidise poor consumers more – to use a metaphor ‘Greater Kailash must subsidise Govind Puri’ more.

Similarly bringing real estate under GST would improve transparency in transactions in the land market. The whole chain of GST credit should be established from the land up to the sale of a residential and commercial building by treating them as ‘deemed services’. This would not require a constitutional amendment. This measure will not only bring in more revenue from direct taxes but more importantly encourage foreign investment by reducing the scope for unscrupulous transactions.

To sum up, the policy measure to kick-start growth should focus on boosting private consumption, private investment and exports in conjunction with reforms in the factor markets especially land and electricity.

VS Krishnan is National Leader – Tax and Economic Policy Group at EY India. The views expressed are personal.

Budget 2020: Income tax cut to hurt revenue, govt should opt for DBT to back the poor

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