By K R Sudhaman
Finance Minister Nirmala Sitaraman is in an unenvious position as she gives finishing touches to general budget 2022 to be presented to Parliament on February one because there appears to be no easy solutions to manifold conflicting issues. At this juncture reigning in on macro-economic fundamentals are equally important as efforts to kick-start the economy with visible signs of growth revival after the covid pandemic.
Economists are divided on whether to move towards fiscal consolidation are allow fiscal deficit to slip for one more year to push expenditure particularly capital to reverse sagging demand coupled with supply constraints. Former RBI governor D Subbarao is right when he says though there is a case for some slippages in fiscal deficit to encourage capital expenditure, Indian economy is not in that position to leverage this possibility. Fiscal consolidation is therefore important and efforts should be to bring down fiscal deficit from 6.8 per cent of GDP this year to close to 6 per cent so that the government sticks to the medium term target of bringing it down to 4.5 per cent of GDP by 2024-25. This is important as India does not have the luxury to allow any further slippages in fiscal deficit because debt-to-GDP is very high at close to 90 per cent. It is not alarming at the moment but this is time to exercise some caution. Inflation too has started looking up giving that much less headroom for RBI to continue with accommodative monetary policy for long.
Former Planning commission deputy chairman Montek Singh Ahluwalia is however of the view a little fiscal profligacy temporarily to find resources for employment generating capital expenditure would be welcome to put the economy back on track.
Economist Arun Kumar feels job creation should get top most priority particularly in the informal sector as they account for bulk of the employment potential. In India 99 per cent of the six lakh odd MSMEs in the country are micro industries and a little over 97 per cent of the employment in MSMEs are in micro industries. After farming, bulk of the employment in the informal sector came from micro industries in the country. Micro industries have been badly hit, more so after the Pandemic and hence resulted in heavy loss of jobs. In fact micro industries woes started soon after demonetization in 2016 as they are mostly in cash economy. Covid and lockdown worsened it. Government should find ways to revive this sector particularly through handholding. These industries are now severely cash strapped besides marketing problems. Revival of this micro sector speedily will revive income generation and thereby give much needed push to demand. Instead of giving people fish by way of income support it is better to teach them how to fish by helping micro sector and job creation.
There is also a view among some economists to have urban employment scheme like the MNREGA for rural employment to provide temporary succor to urban poor who have lost jobs during covid. This is a good idea but Subbarao is against it for two reasons. Finding money for it would be difficult in this tight fiscal situation as urban wages are much more besides there will be unintended consequences of encouraging large scale rural to urban migration which would be more grave especially at this juncture. Better thing would be to strengthen and allocate more for MNREGA programme to step up rural income.
Since the fiscal situation is tight there is need for stepping up revenue generation particularly from tax. As it is tax-GDP ratio is very low in India with 97 per cent of the population out of the tax net. It is worthwhile to consider innovative ways of increasing revenue generation. There is a hue and cry from salaried class and middle class for more income tax sops as they had been hit by loss of income, higher medical expenditure and so on. The corporates were provided tax cuts two years ago to encourage them to invest more but that did not happen as they already had excess capacity which is still continuing and new investments are therefore not forthcoming. So there profits have swelled. Sitharaman could therefore consider levying some sort of covid cess on corporates to mop up revenue temporarily while keeping the rates at the present level so that they contribute some additional revenue for economic revival if they are not making fresh investments. It is also time to consider agriculture income tax from rich farmers. This is a long debated issue and would require legislative measures as well as it is a state subject at the movement. Also the rich farmers and corporate lobby is very powerful, strong and influential as many of the rich farmers are in politics. Many corporates are into agriculture for tax avoidance. This is an issue worth pondering over but this cannot happen overnight but days are not far off when agriculture income of rich farmers are brought into income tax net
As it is 40 per cent of revenue mobilization go for debt servicing – that is interest payment. That apart there are committed expenditure like government salaries, pension, defence expenditure, health and education on which there is little scope for reduction. If at all there is any scope it is only to increase it further. There are some committed subsidy bill for social services like food ration, which are essential in this difficult period. In such a situation there is not much money left for finance minister to dabble with. She would be left with not much scope but to raise more revenue to find resources for expansion of capital expenditure. Disinvestment, asset monetization and privatization of public enterprises could generate some additional revenue. But experience show, the government has invariably fallen short of the target.
Notwithstanding all these difficulties finance minister will have to announce some populist measures in view of impending assembly elections in five states, particularly India’s largest state Uttar Pradesh where the ruling political party’s stakes are very high. So it will have to be a bit of election budget as well indulging in some populism.
Government is left with no choice as regards stepping up of capital expenditure particularly in infrastructure like roads, highways, railways, ports and so on where there is a huge deficit and has huge potential for employment generation. Government has already indicated it would step capital spending in the budget and how it is going to do is a matter of detail.
These are some of the issues that Nirmala Sitharaman will have to address in the budget. What we need at the moment is not big ticket reform measures in the budget but some out of the box thinking to push capital expenditure, employment generation and additional revenue mop up without impinging upon macro-economic fundamentals to ensure the country returned to high growth path in the foreseeable future. (IPA Service)