Markets

Budget, the dog that didn’t bark

J Mulraj | Updated on February 07, 2020 Published on February 07, 2020

Sherlock Holmes once solved a mystery because the dog didn’t bark. The Union Budget, presented on February 1, was unexciting, but, given the condition of the Indian economy, and given that the corona virus, if uncontained, can hurt global GDP growth by 0.3 per cent, ought to have been bolder and more innovative.

Likewise, foreign SWF (sovereign wealth funds) were tax exempted from investments made before 2024 in Indian infrastructure, but domestic investors hoping for a scrapping of long-term capital gains tax were disappointed it wasn’t. Tax collected is paltry, perhaps not worth the effort to monitor and collect it.

The Budget also displayed myopic and unnecessary tinkering, eg, in slicing income tax slabs at intervals of ₹2.5 lakh, resulting in many more. One thought the effort was to simplify things and this tinkering reveals a bureaucratic mindset instead of a visionary one.

Had the dog barked, it may have spoken about the need to introduce out-of-the-box ideas. There are several such.

Veteran journalist, Swaminathan Iyer, feels that the legalisation of betting on cricket, and taxing bidis, can generate enough revenue to solve our fiscal problems. Why didn’t the FM consider that? Cigarettes bear a heavy burden of ‘sin tax’ but bidis not, ostensibly because it would impact the farmers and workers (but more likely because a lot of the political class makes bidis).

Another veteran journalist, RN Bhaskar has, in his book (worth reading) ‘Game India’, has suggested that a policy to promote roof top solar would help generate 80 lakh jobs! This is what Germany, under visionary minister Hermann Sheer, did, by granting a feed-in tariff for solar power that was twice the feed-out tariff. A whole army of roof-top-solar installers, and investors, sprang up, and provided more jobs than the German automobile industry had!

The solar power scheme is an effort to double farmer income.

This columnist has an out of the box, financial engineering idea to tackle India’s largest item of expenditure, viz, interest and debt servicing.

Why not offer investors a series of Government bonds, eg, the ₹40,000 crore worth of 7.37 per cent bonds maturing in 2023 and give an offer that anyone who buys the bonds, and surrenders them to the RBI before March 31, agreeing to relinquish all interest and repayment liabilities, would be entitled to a deduction of, for example, 300 per cent (?) of the face value of the bonds surrendered. The exact percentage can be worked out, to give buyers a tax advantage.

This will have several consequences. For the Government it would be a time arbitrage, swapping future debt servicing liabilities for current tax reductions.

For the buyer and seller there would be a tax arbitrage, with no/low tax payers (such as weaker banks) selling the bonds to raise capital, and high tax payers buying them for the deduction. This would help reduce the pumping in of additional capital to weak banks; and help create a yield curve.

If successful and repeated, it would bring down government’s debt obligation burden and improve its credit rating. The scheme will work if the tax benefit is worked out by a visionary but not if worked by a myopic bean counter.

Stock markets have rallied on the hope that the caronavirus can be contained, and a vaccine for it found quickly. But has resulted in huge disruptions in supply chains. More than 300 of the top 500 global companies have a presence in Wuhan which is locked down. BP warns that global oil demand can drop 40 per cent; Brent crude prices have already dropped.

But the ‘bad-news-is-good-news’ theory expects further easing by central banks, and this has driven up stock markets. Cest la vie.

The writer is India Head — Finance Asia/Haymarket. The views are personal.

Published on February 07, 2020
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