Bringing fiscal policy back into the spotlight

TCA Ramanujam / TCA Sangeetha | Updated on: Jun 28, 2019
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The economy needs a strong dose of Keynesian style pump priming. The fiscal deficit target can be given a miss for now

“There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.” — William Shakespeare

This is the best of times. This is the worst of times. That was how Charles Dickens described France before the Revolution. This can as well apply to India today. Unemployment is at an all-time high. Growth is falling. Our GDP grew from $1.32 trillion in 2009 to $2.74 trillion in 2019 in nominal terms, a compounded average growth of 7.5 per cent, it has now fallen to 5.8 per cent in Q4 of FY19 .

If we aim at becoming a $5-trillion economy in five years, our GDP will have to grow at 12.5 per cent. We have had our successes. ‘One Nation One Tax’ was successfully implemented. Fiscal deficit has been contained from 3.9 per cent in 2016 to 3.4 per cent. The Insolvency and Bankruptcy Code has been brought on the statute.

The inflation trend

The past several years, especially since Raghuram Rajan took over as RBI Governor, saw inflation control being the sole aim of monetary policy. Monetary policy has been unconventional across the globe and the distinction between monetary and fiscal policy has become blurred. Esoteric and unconventional monetary policy tools, in the words of Nouriel Roubini, are now the norm. Terms like ZIRP (Zero Interest Rate Policy), QE (Quantitative Easing), CE (credit easing) or UFXINT (Unsterilised Effects Intervention) are now used in most advanced economies and some emerging markets as well.

The Chicago School has always drawn inspiration from Milton Friedman. The rise of the RBI to a new eminence in the past five years indicated the undue importance given to monetary policy over fiscal policy.

Friedman himself narrates an anecdote. He was addressing the Delhi University on Monetary Theory and Policy. VKRV Rao while proposing a vote of thanks launched a broadside on his theory and warned the students in the audience that they will flunk if they answered questions in the money exam along Friedman’s lines.

Unfortunately, under Rajan’s dispensation, inflation targeting a la Friedman became the sole objective to the detriment of growth. The Finance Ministry had no say. Friedman was enthroned and Keynes was forgotten. This was the inverse of the situation prevailing under Nehru, TT Krishnamachari and B Rama Rao.

Inflation has now eased to a 22-month low.

India Ratings and Research principal economist Sunil Kumar Sinha said the core inflation at 1.2 per cent was at a 29-month low in May. What does this point to? RBI is still wavering about rate cuts and growth plummets.

Pump priming

The present economic situation calls for bold measures and an emphatic shift from monetary policy to fiscal policy. It does not matter if fiscal deficit target is not adhered to for a year or two. Growth has to be fostered. There should be a temporary injection of purchasing power into the economy. A temporary rise in government spending, financed by borrowing rather than taxes, can raise incomes through its multiplier effects which will allow investment to recover.

Once the cumulative recovery process gets going, it will be possible to eventually receive sufficient extra revenue to restore government debt to its original level. This is the Keyensian theory of pump priming.

The Finance Minister is confronted with the trade and tariff wars unleashed by the US and China. The temptation to retaliate is great. We need import liberalisation but not at the cost of Make in India efforts. Is it not ironic that we import images of Lord Ganesha from China?

Revenue raising measures

Huge expenditure is being incurred or promised. Farmers have to be paid ₹6,000 per year, and Ayushman Bharat requires funds. The Bharat Mala project like the Golden Quadrilateral, the Railway expansion, the Ganga Canal Cleaning Project, the linking of Godavari and Pennar should be taken up in right earnest to add to employment opportunities on a large scale. Additional resources must be mopped up. The new Finance Minister has started off in right earnest.

* There has been a sudden crackdown on tax evasion and money laundering indulged in by tax evaders not matching their income tax and GST returns. Notices have been issued for unearthing the mismatch.

* Inefficient and corrupt tax officials have been given the marching orders.

* Prosecution provisions have been tightened up ruling out compounding in cases of serious tax frauds.

* The present Finance Minister has been able to persuade the G20 countries to accept suggestions for tackling the problem of MNCs indulging in base erosion and profit shifting.

* Much more remains to be done. GST reforms must include reducing the slabs and pruning the rates.

* Dividend taxation calls for a fresh look. Is it fair to treat a commoner earning dividend of ₹1,000 on par with a billionaire earning in crores?

* Every time taxation of the affluent is talked of, the government comes with an increase in surcharge. A bold measure must be taken to introduce a 40 per cent slab for crorepatis.

* The promises made in the Interim Budget should be fulfilled.

* The SIT constituted on the directions of the Supreme Court suggested that a tax be levied on betting. It quoted FICCI and KPMG report to show that a sum of ₹3 lakh crore can be brought to tax, and at the rate of 20 per cent the Exchequer can earn revenue between ₹12,000-₹19,000 crore.

All eyes on Budget

TT Krishnamachari earned a name with the introduction of the integrated tax code. Manmohan Singh attained international fame by adopting liberalisation and globalisation. Arun Jaitley will be remembered for the GST. Nirmala Sitharaman fortunately comes with no ideological baggage.

Our Prime Minister swears by the maxim Sabka Saath, Sabka Vikas . The Budget is being presented in the 150th birth anniversary year of the Mahatma. Nirmala Sitharaman can be expected to launch surgical strikes on poverty — both rural, and urban.

Ramanujam is a former Chief Commissioner of Income-Tax, and Sangeetha is a Chennai-based advocate

Published on June 28, 2019

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