Fine Balance Of Prudence And Populism

It’s important to take a telescopic view of the 2019-20 interim Union Budget delivered with some panache by Finance Minister Piyush Goyal on February 1, 2019.  

Goyal achieved a fine balance between fiscal prudence and pre-election populism. A long view unpeels both intent and outcome of  the Budget’s proposals. Start with farmers. The Opposition has claimed that the income support of  Rs 6,000 per year given to farmers with holdings of less than two hectares is, as Congress president Rahul Gandhi put it, “an insult”.  

Is it? At Rs 500 per month, the amount is modest but it is a top-up to all the other benefits farmers already receive: fertiliser subsidies, crop insurance, loan waivers and minimum support price (MSP). Indian farm productivity is low. The long-term answer to alleviating farmer distress lies in introducing GM crops that boost yield per acre as well as providing low-cost finance for drip irrigation technology to tide over bad monsoons.  

The Budget moves away, in policy intent, from loan waivers and subsidies to direct cash transfers (like Telangana and Odisha) so that farmers can invest in new crop and irrigation technology. That alone can create a healthy farm sector on which 50 per cent of Indians live but which contributes only 14 per cent to India’s GDP. This mismatch lies at the heart of farmers’ distress.  Increasing direct income support from Rs 6,000 a year to Rs 12,000 a year (which will cost the exchequer Rs 1.50 lakh crore annually, double the Budget’s allocation) is the only realistic way to help farmers invest in new technology. That will create the foundation for a sustainable solution to India’s chronic agricultural crisis.  

The second key idea in the interim Budget is a welcome re-examination of personal income-tax rates. While the interim 2019-20 Budget has proposed a full rebate for taxable income up to Rs 5 lakh, much more needs to be done. Consider the numbers. For assessment year (AY) 2017, total income-tax filings were 4.98 crore. Of these, 4.93 crore filers submitted returns of  taxable income below Rs 10 lakh, accounting for 99 per cent of total returns filed. Thus only one per cent (five lakh returns) out of 4.98 crore tax returns were for taxable income above Rs 10 lakh.

The math gets even more lopsided when we turn to the tax paid by those with taxable income below Rs 10 lakh and above Rs 10 lakh. Total tax paid by those with taxable income below Rs 10 lakh (comprising 99 per cent of all tax-payers) was just over Rs 1.75 lakh crore (24.49 per cent of  the total).  In contrast, the total tax paid by those with taxable  income above Rs 10 lakh (comprising five lakh tax-payers or one per cent of all tax-payers) was a humungous Rs 5.42 lakh crore (75.51 per cent of the total).

Thus of  the total personal income-tax collected in AY2017 (Rs 7.17 lakh crore), over 75 per cent was paid by just one per cent of  India’s tax paying population. This anomaly calls for deep structural tax reforms in the full July 2019 Union Budget by whichever government is in office then. With the introduction of  GST, tax filers have risen to 6.84 crore in 2018-19 – a 40 per cent jump in less than two years. The benefits of  tax reforms will therefore have an increasingly positive impact on tax revenue.

In his post-Budget interviews, Goyal said the Central Board of Direct Taxes (CBDT) had already put in place an electronic mechanism under which 99.54 per cent of all future tax returns would be accepted unquestioningly. Refunds would be made within 24 hours. Algorithmic models, eliminating a human interface with an I-T officer, would minimise harassment to tax-payers. Assuming only 0.46 per cent of  I-T returns, as Goyal said, would be examined, the number comes close to 3.5 lakh returns (based on 6.84 crore tax-filers in 2018-19). That is still a large number but as most will be tax-payers with taxable income above Rs 10 lakh, paper work for the I-T department will be more focused and less time consuming.  

There is now also a need to raise the non-taxable threshold to Rs 8 lakh which, with exemptions, will take most of the 4.93 crore small tax filers, with taxable income below Rs 10 lakh, out of  the tax net. They contribute Rs 1.75 crore tax (25.49 per cent of total tax receipts). How will this amount be made up?

The answer lies in greater compliance among high-income tax-payers. There is plenty of  head-room for growth here. An increase of just 20 per cent in the number of tax filers with more than Rs 10 lakh taxable income – i.e. from five lakh to six lakh filers – can potentially boost tax revenue significantly, largely making up for losses from small tax-payers. Lower administrative costs as a result of dealing with fewer tax-payers will ensure a more efficient tax system and capture upside in revenue growth from large tax-payers.  

Budget sub-texts
The interim Budget had several other interesting sub-texts. The Rs 3,000 per month pension plan for 12 crore workers over the age of 60 in the unorganised sector with monthly income less than Rs 15,000 – including labourers from the Hindi heartland, many of them SC/STs – is an electoral winner. But while Goyal had the 2019 Lok Sabha poll in clear sight, he did not ignore the need for fiscal prudence. In an expenditure-oriented Budget to boost consumption in both the rural and urban economies in order to revive growth, Goyal managed to contain slippage in the fiscal deficit from the targeted 3.3 per cent to 3.4 per cent.

In a blistering counter to the Opposition’s charge that many pre-Budget schemes of the Modi government were exaggerations and his was an “election budget”, Goyal said in an interview with DD News: “As for the Budget being an election Budget, when Ayushman Bharat was introduced, there were no elections around the corner, when 100 per cent willing people were provided electricity, there were no elections. It was in 2014, right after elections, that the PM had declared that cleanliness was of prime importance to him. There were no elections then. The Congress, which has ruled for 55-65 years, provided toilets for only one in three women. Why was sanitation coverage only 34 per cent during their rule and is now 98 per cent under the PM? Even after 70 years of Independence, over 2.5 crore families, 5-6 crore kids, were deprived of electricity. Should people not have the right to have bank accounts? It is unfortunate that the Congress deprived people of development for so many years, but is now criticising us when we are pushing things in the right direction, with a clear conscience. They cannot have the empathy that is required to work for workers, farmers and taxpayers.”

Beyond the politics, however, lies the grim reality of India’s poverty, shambolic civic infrastructure, a broken primary education system and widespread malnutrition. These have consequences on economic productivity. The full July 2019 Budget should therefore take a root-and-branch approach to lifting India over the next decade from a low-income country with a per capita income of $2,000 to a middle-income country with a per capita income of $6,000. Tripling per capita income will not be easy if real structural reforms in agriculture, land acquisition, labour laws, local municipalities and the bureaucracy do not take place.  

Assuming nominal GDP grows at an annual rate of 11 per cent (including 4 per cent inflation) India’s nominal GDP will triple from an estimated $3 trillion in 2019 to $9 trillion in 2030 at current exchange rates. India’s population is expected to rise to 1.45 billion in 2030. Thus per capita income would be around $6,000 in 2030. That outcome would lift a large section of  the poor – currently estimated at nearly 300 million – out of debilitating poverty.  

In his Budget speech, Goyal spelt out a vision for 2030 across several broad domains, ranging from infrastructure and education to healthcare and clean drinking water. The stakes are high. India is at an inflection point. Over the next decade the country has a breakthrough opportunity to unshackle itself  from the chains that have bound it, economically and socially, for far too long.