Budget: Challenges before the govt

The Centre needs to take up austerity measures to curtail unnecessary govern-mental expenditure.

It’s again that time of the year where the government would like to allocate financial resources and provide policy direction to the country to register higher growth and economic development.

Budget 2016-17 is on the anvil and peoples’ expectations are high. To make these expectations a reality, the government encounters many challenges.
First and foremost is whether the government should stick to its path of fiscal consolidation by lowering its fiscal deficit to 3.5 per cent or stimulate growth through higher spending and thus increase the fiscal deficit.

Traditional wisdom suggests that the government needs to take austerity measures to curtail unnecessary governmental expenditure and make public investment productive by building physical infrastructure such as technical educational institutions, health care systems, roads, ports, airports, plants and machinery, inventory management, and further investing in agriculture and galvanising industrial growth.

Investment in and creation of physical infrastructure will be a boon as it will effectively help us in the creation of an effective global supply chain and promote trade facilitation which India has signed as part of the agreement in WTO’s Bali Ministerial conference in 2013. The key to such important challenge lies in how the government orchestrates prudential fiscal management, which is an important ingredient of macro-stability and long term growth.

But, the problem is the government has some obligations towards welfare of its citizens which cannot be completely ignored such as the Seventh Pay Commission. The irony is that with the implementation of SPC salaries and wages are going to increase which will be a further burden on the state’s exchequer.

However, at the same time, the SPC has the potentiality to spur the demand and hence spending by the consumers will increase consumption which in turn contributes to growth.

Second, the government faces an insurmountable challenge in the area of agriculture. Out of 1.27 billion people, more than two-thirds is still dependent on agriculture. Agricultural production in the last couple of years is dwindling. Heavy reliance on monsoon, archaic technological help, lack of FDI and minimum subsidy are unable to pull farmers’ population out of this incessant crisis.

Farmers’ deaths are on the rise without showing signs of abating. However, the dramatic fall in the global oil prices is a boon for the government as it can generate revenue for its coffers, and hence it’s time that it should address agricultural issue well in Budget 2016.
The government should take initiative to provide crop insurance scheme to the farmers. For investments in agriculture to increase, the government will have to allocate huge financial resources with the help of the private sector.

Corporate incentives

Third, the challenge will be in the realm of providing incentive to the corporate. One way of doing it is to lower the corporate tax. India's tax rate for companies is unfavourable when compared to most other emerging economies.

Many firms and global companies have pleaded in the past to reduce this to world’s comparable standards. This year’s budget may reduce it to 20 per cent and put out a clear road-map in seeking consultations on tax rate and exemptions. Lower corporate tax rate is a driving force for industrial growth.

Fourth, implementation of the GST will be a huge advantage and is expected to decrease compliance burden for businesses as well as reduce paper work. It will create a seamless pan-India market and also bring down the total incidence of taxes by el-iminating cascading effect of taxes on goods and services. It further promotes trade facilitation. The budget needs to remove the inefficiencies in the system like inverted duty structures to pave the way for an efficient GST.

Fifth, challenges are also faced by the manufacturers, like the inverted duty structure due to Free Trade Agreements that make Indian manufacturing uncompetitive for white goods. There has been a rise in imports from low cost regions such as China and South East Asia. Modified Special Incentive Package Scheme should be extended to these consumer durable products.

Moreover, insufficient and underdeveloped local supplier base and high cost of capital and other manufacturing costs due to frequently revised energy efficiency requirements do not provide the local manufacturers a favourable environment.

These demands are genuine and the government must address this issue in the budget. It should concentrate on expanding its domestic consumption drive especially by targeting rural demand on white goods as exports are shrinking.

Lastly, the salaried class has a lot of expectations from the budget. Increase in the personal income tax exemption limit and a higher deduction limit on home loan interest are catalysts for revival of growth. Considering the increase in the cost of living, the current basic exemption limit of Rs 2.5 lakh should be raised to Rs 3 lakh.

It should also take into account that increase in basic exemption limit could be linked to the rate of inflation and be raised every year automatically. Challenges are enormous. The government needs to work out its priority through prudential fiscal management policy.

(The writer is Professor, Lal Bahadur Shastri Institute of Management, New Delhi)