The economy is currently in a nascent stage of recovery from the pandemic-related shock. The priority for the government at this juncture is reviving business and consumer confidence and the ensuing Union Budget needs to focus on that. Consequently, the measures announced during the Budget are likely to aim at near term support to boost consumption, as well as long term support to creating the necessary physical and social infrastructure needed for supporting the country’s long-term growth ambitions.
Given the significant adverse impact suffered by certain segments of the services sector during the pandemic, especially contact-intensive businesses such as travel, tourism and hospitality, one would expect the Budget to announce supportive measures to handhold such sectors back to growth. This may come in the form of extension of the Emergency Credit Line Guarantee Scheme (ECLGS) scheme and also additional liquidity measures to be undertaken either directly by the concerned ministry or RBI.
Further support to India’s ambition of becoming a global manufacturing hub may come in the form of the government expanding the outlay towards production linked incentive schemes (PLIs) to target new manufacturing sectors, along with a specific focus on the growth and development of MSMEs.
The government’s estimate of gross fiscal deficit of 6.8 per cent of GDP broadly looks achievable during FY21-22. The Union Budget will disclose the initial estimate for FY22-23 fiscal deficit, which is expected in the range of 5.6-5.8 per cent of GDP. With the outbreak of Covid, the federal government’s fiscal deficit shot up to 9.4 per cent of GDP during FY20-21, from a sub-4 per cent average in the previous five years. Consequently, India’s public debt, which averaged around 68 per cent of GDP in the pre-Covid years, has crossed the mark of 75 per cent of GDP, a level that was last witnessed during the mid-2000s. The margin for error in managing fiscal deficit and debt may not be large, with the possibility of global interest rates hardening in the coming year and beyond.
The overall fiscal roadmap is, thus, complicated for the government. While support for the economy must be there in the near term, the government has to be mindful of consolidating the deficit and debt indicators over the medium term. To strike an effective balance of these two priorities, it is critical for the government to lay down the medium-term fiscal roadmap in the upcoming Budget. While mopping up strong revenues for ensuring additional spending firepower is desirable, the headroom to impose new taxes and surcharges on individuals or corporates is limited, especially after material increase in tax liabilities of the “super rich” individuals in recent years.
In fact, there has been a long-standing demand on re-looking at personal income tax rates to ensure greater compliance and boost consumption. Given that consumer confidence has just started recovering in recent months from a position of huge dent, it is to be seen how exactly the government responds to that demand. As regards indirect taxes, while GST rates for a number of commodities were revised upwards of late by the GST Council, it may not be easy to continue doing so at the current stage of nascent and uneven growth recovery. Against such a backdrop, the disinvestment agenda for next financial year and beyond will be watched closely.
Additional measures to boost farm income and ensure the welfare of people living in semi-urban and rural areas may also be on the anvil. Keeping in view its strong forward and backward linkages with various other sectors in the economy, the housing sector may also receive a shot in the arm if greater deduction for tax purposes is allowed on principal and, more so, interest repayment over the current cap of ₹1.50 lakh (on principal) and ₹2 lakh (on interest). To boost the depth of the markets in REITs and InvITs, some changes to the way these structures are taxed may be considered.
The government has set itself ambitious targets for generation of green energy, and taking carbon emissions to net zero in a phase-wise manner. To encourage new businesses to come up with products and services for this, as well as help existing enterprises scale up, there may be some tax concessions for incurring expenses towards meeting ESG goals, or equity/debt funding mechanisms.
Banks and financial services institutions may be granted tax incentives for meeting and surpassing financial inclusion goals; as well as maybe some rebate on costs for setting up digital/physical infrastructure that seeks to bring formal financial services to people at the bottom of the pyramid.
The author is the Chief Economist and Head of Research, Bandhan Bank. Views are personal