A structural constraint that budgets must ease
Premium‘Agile’ or not, for fiscal policy to gain efficacy, we must slowly enlarge our tax intake as a slice of GDP without slowing growth or allotting burdens inequitably. Spare the easy-to-squeeze
On Tuesday, when our finance minister Nirmala Sitharaman presents the Union Budget for 2022-23 in Parliament, among her challenges would be to empower fiscal policy as an economic tool. Not just because it must now play a bigger role in recovery support as India’s economy emerges from a covid crevice, but because we need to ease a chronic shortage of discretionary funds. Even the US, that champion of free enterprise, mops up taxes worth a quarter of its gross domestic product (GDP), while we sweat to achieve a tax-revenue base of only about one-tenth of GDP. This spending constraint has kept our fiscal efficacy low since 1947, with routine outflows on interest, salaries, overheads, etc, leaving too little money for a stimulus splurge in times of stress. The covid pandemic starkly exposed our limitations. The Centre’s ‘agile’ calibration of spending, as outlined in this year’s Economic Survey released on Monday, could only offer spurts of help at best. In 2022-23, as monetary-policy support begins to reverse (or turn reckless), our revival would still require fiscal aid to attain both stability and a broader base. A cushion for the worst-hit and an infrastructure push apart, India sorely needs an education and healthcare emphasis that can firmly consign an old paradigm of state apathy to history. But where is the money for it?
Even with extra safety nets, credit-flow enhancers, business incentives and new public projects, India’s stimulus was modest in global comparison. Yet, combined with a revenue crunch, it widened our fiscal deficit to 9.2% of GDP in 2020-21, a figure that looks likely to end this year below 7%. The Centre aims to reduce this gap to 4.5% by 2025-26. However, fiscal compression in 2022-23 would call for a tax boom. Thankfully, collections have lately been upbeat. At ₹13.6 trillion till November, intake had crossed over 75% of the year’s target with four months left to go, a sharp bounce-up from 2020-21. But then, that would still be less than a tenth of GDP, against a rich-world average of 34%. India clearly needs a bigger slice. While our economy has expanded vastly since 1991, this ratio has somehow stayed stuck in single digits. India’s 2017 adoption of GST, like the currency switch that preceded it, was expected to widen our tax net by pushing all commerce to go formal. Technology tools have also been used to capture data and catch tax dodgers, even as authorities grew strict (and overzealous in some cases). Our taxpayer base has swelled as a result, but not sufficiently to raise that ratio.
Within taxation, it’s important to get the split of direct and indirect levies right. As direct tax revenues have rebounded this year after last year’s dip, both are likely to end 2021-22 as equal coffer-fillers. Indirect taxes are regressive, though, for they impose the same burden on the poor and rich alike. For the sake of equity, we must rely more on taxes that rise by income level. These can’t be hiked too high, as overtaxing earnings can dampen growth. Just recently, corporate taxes were cut for India to attract (and retain) businesses with lower-tax global options. Income tax paid by top earners can hardly get stiffer without a blowback, even as the bulk of our taxpayers can’t be squeezed if private consumption is to stage a revival. As most households have seen incomes drop, they deserve relief instead. A tax on wealth, which is hard to spot, would be difficult to levy and easy for a globalized elite to evade. Our options are few, but we must aim for more fiscal firepower.
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