Cut income tax rates, sell smaller public sector banks, overhaul GST.
In the , we explained why the central government cannot spend its way out of the current economic slowdown. If you haven’t read it, I suggest you do before reading this article. It will just give you better context for why I am saying what I am saying in this piece.
Here, we look at seven things the government can do through the upcoming budget to get the Indian economy back on track.
1) As we explained in the first piece, India’s private consumption expenditure growth slowed dramatically in 2019-20. It is thus important to revive private consumption first. Only once there is a slight revival in private consumption will companies think of investing and expanding, simply because at the end of the day companies produce goods or offer services that people consume. Also, private consumption constitutes nearly 60% of India’s economy.
In September last year, the government cut the income tax rates for corporates. While lower tax rates for corporates are required to enable them to compete on the export front with other countries in Asia, what was required in the short term was a cut in personal income tax rates. A cut in personal income tax rates or increasing income tax slabs for that matter is the quickest way of putting more money in the hands of people. People are likely to spend this money, and help revive consumption.
One argument offered against the effectiveness of a personal income tax cut is that there aren’t enough people in India who pay income tax. This is true. But the argument still doesn’t hold.
See Table 1 below.
The total number of taxpayers in assessment year 2018-19 – income tax returns for income earned in one financial year are filed in the subsequent financial year which is called assessment year – stood at 8.46 crore. Before we go further, it is important to define who exactly is a taxpayer. An answer to a question raised in the Lok Sabha provides this definition of a taxpayer: “a person who either has filed a return of income for the relevant Assessment Year or in whose case tax has been deducted at source in the relevant Financial Year but the taxpayer has not filed the return of income.”
The definition of a taxpayer includes everyone who files a tax return. Now, just because someone has filed a tax return does not mean they are paying income tax. In assessment year 2018-19, the total number of people filing income tax returns stood at 5.53 crore. Of them, around 2.24 crore did not pay any tax. So, only around 3.29 crore people paid income tax and filed tax returns as well.
In addition, the number of people who paid tax deducted at source but did not file income tax returns in the same year stood at 2.93 crore (8.46 crore minus 5.53 crore) . Therefore, the total number of people who paid some form of income tax in assessment year 2018-19, irrespective of whether they filed tax returns or not, stood at 6.22 crore (2.93 crore plus 3.29 crore).
Against India’s overall population of nearly 130 crore, 6.22 crore is not a substantial number. But these are individuals who have genuine purchasing power in the economy. Moreover, many of these individuals are heads of their households. An average Indian household has five people. Hence, a substantial portion of the population is going to be positively impacted by a personal income tax rate cut.
The cut will lead to these individuals consuming a little more than they presently are. Also, it is worth remembering that the whole country need not start consuming at the same time to get consumption growth back on track. Even if a section of the population starts doing so, it makes sense because one man’s spending is another man’s income. Hence, if a section of the population (let’s say the income taxpayers or what we can call the middle class) starts to spend, it can have a multiplier effect on overall consumption in the economy, which will help economic growth.
Over and above this, there is a clear need to reform the Income Tax Act of 1961, taking inspiration from the Direct Taxes Code of 2009.
2) While a personal income tax rate cut will help the middle class, something also needs to be done for those at the bottom of the pyramid. The allocations to the Mahatma Gandhi National Rural Employment Guarantee Scheme need to be increased. Of course, this is not the most efficient scheme going around, given the leakages it has. Nevertheless, there is no other way of putting money in the hands of the poor quickly than this scheme. This should help in the revival of the fast moving consumer goods sector. The total allocation to the scheme in 2019-20 is Rs 60,000 crore lower than the Rs 61,084 crore that was spent in 2018-19. This needs to go up substantially, to around Rs 1,00,000 lakh crore so that more people are able to participate in the scheme in 2020-21.
3) In the first two points I have talked about cutting taxes and spending more money. Dear reader, you might think this goes against what I said in the last piece that simply spending more money is not the solution. But what I also said is that a lot depends on how the government decides to finance this expenditure.
If the government can earn adequate money to finance this expenditure, then spending more really can’t be a problem. How does the government earn more money? Over the years, the government has been selling shares in public sector enterprises it owns to earn money. This year the disinvestment target had been set at Rs 1.05 lakh crore, but by the end of November 2019, only Rs 18,099 crore or 17 percent of the target had been earned.
Along with having a financial target for disinvestment, it is important that the government comes up with a disinvestment calendar, which clearly specifies the names of companies it plans to sell (partly or fully) and the tentative deadlines. This will bring some order in the overall scheme of disinvestment.
Also, it is important that the government carry out genuine disinvestment (what it calls strategic disinvestment) where it sells companies to the private sector and not just get one public sector enterprise to buy another, and move money around from one pocket of the government to another. This is also where it’s likely to earn a premium over the current price of the stock of the company.
Typically, attention towards disinvestment is paid only in the second half of the year. This attitude needs to change and disinvestment should be on the agenda of the government from April 1, as soon as the financial year starts.
4) Other than selling shares in public sector enterprises, there is a need for the government to start selling land that it owns through these enterprises or otherwise. One example I have offered year on year is that of the Bicycle Corporation of India, based out of Worli in Mumbai, close to where I live. The government doesn’t need to continue owning a bicycle company, which doesn’t make bicycles anymore, but it continues to own land bang in the middle of Mumbai.
Another great example is that of the Heavy Engineering Corporation on the outskirts of Ranchi, the city I grew up in. The amount of the land that the company owns is a small city in itself. And given that the city of Ranchi has a land shortage owing to the Chotanagpur Tenancy Act, it is even more important that this land is sold and the shortage is dealt with. It will be a win-win situation for everyone.
There are scores of such examples. A good starting point would be to make an inventory of all the land that public sector enterprises, which are down in the dumps, currently own.
5) It’s not just important to earn more money for the government, it is also essential to prioritise what it should actually be spending money on. Between April 2014 and mid-September 2019, the government spent Rs 3.13 lakh crore recapitalising public sector banks and keeping them going. In fact, the bulk of this money was spent after April 2017. Between April 2017 and March 2020, a total of Rs 2.66 lakh crore would have been spent on recapitalising these banks.
Every rupee that has gone towards recapitalising public sector banks could have gone somewhere else. While one understands that it may be important for the government to keep owning bigger banks like the State Bank of India, Bank of Baroda Bank, Punjab National Bank, Canara Bank, the same argument cannot be made for smaller banks like the Indian Overseas Bank, Central Bank of India, United Bank of India. Some of these smaller banks have sucked up a lot of money from the government over the years.
Take a look at Table 2, which plots the money invested by the government in some of the smaller banks.
Thousands of crores of rupees have been spent to keep these banks going over the years. Along the way, these banks have lost business to private sector banks in a big way. While the government resists privatisation of the banks it owns, the banking sector is getting privatised on its own, like the telecom sector and the airline sector before it. In this scenario, the government needs to do a serious rethink on whether it wants to continue owning all these banks. If it continues to own them, it will end up owning dud banks worth nothing, just as it ended up with dud telecom companies and a dud airline. If selling these banks is ruled out, then at least the government should behave like an investor in these banks, not as their owner. This means the department of financial services needs to take a backseat in the running of the banks and the banks need to deal with just the Reserve Bank of India. This will help them compete better with private sector banks. Also, merging these banks with bigger public sector banks is really not a solution. All it does is that the dirt of the small bank gets swept under the carpet of the bigger bank.
To get a sense of what the money not going into rescuing banks can be used for, consider that it takes Rs 1,00,000 crore to build a 10,000-km, four-lane highway (Source: In Service of the Republic by Vijay Kelkar and Ajay Shah). From the economic point of view, this is a no-brainer: the government should be spending money building roads, than rescuing public sector enterprises. The bang for the buck will be clearly more. And those at the absolute bottom of the pyramid will end up earning more money. This will help in economic revival.
6) Another area where the government needs to rapidly relook at its policy is the purchase of rice and wheat directly from farmers through the Food Corporation of India and other state procurement agencies. As of January 1, 2020, the FCI had stocks of 565 lakh tonnes of rice and wheat (237 lakh tonnes of rice and 328 lakh tonnes of wheat). As per the stocking norms, as of January 1, the FCI should have had 214 lakh tonnes of rice and wheat, including the operational reserve as well as the strategic reserve. The current reserves of the FCI are a whopping 164% more than the norm. This, of course, means that the government (through the FCI) has ended up spending a lot of money on rice and wheat, which will rot in the godowns of the FCI after some time. Of course, this is a reflection of the poor agriculture marketing system in the country, which no government seems to want to tackle.
But imagine the wastage that is happening. Also, farmers are producing more rice and wheat than is required and not enough of vegetables, pulses, oil-seeds. (This is not the fault of farmers in any way. Human beings respond to incentives. If the incentive is to overproduce rice and wheat, then that’s exactly what will happen). This is one area waiting for the right things to be done. The budget is the right time to start reforming the mess that prevails in this area.
7) It has been two and a half years since the Goods and Service Tax was put in place. It’s time for a rapid overhaul of this tax. Of course, there are bigger issues such as whether the system should move towards fewer and lower tax rates. While politicians can take their time to decide on that, the average GST payer continues to have a tough time.
Chartered Accountants are having a tough time simply filing returns. In fact, on January 20, many of them did not receive the one time passwords necessary to file the return. Such problems should not be happening two and a half years after the launch. Also, the entire GST system has been designed with the assumption that human beings won’t make mistakes while filing returns. This needs to change.
Not surprisingly, this has led to a loss of revenue for the government. In 2018-19, the central government had hoped to earn Rs 6.04 lakh crore through the central GST. This was later revised down to Rs 5.04 lakh crore. The total amount finally collected was Rs 4.58 lakh crore, around a fourth lower than what was originally envisaged.
In 2019-20, the central GST target was originally set at Rs 6.10 lakh crore in the interim budget presented in February 2019. Good sense then prevailed and the number was revised to a much lower Rs 5.26 lakh crore when the actual budget was presented in July 2019.
In the first eight months of the financial year, April to November, Rs 3.28 lakh crore has been collected as central GST, at an average of around Rs 41,000 crore per month. The average needed to meet the target stands at around Rs 43,800 crore per month.
In fact, a recent points out that as per an estimate made by the Fifteenth Finance Commission, the government may be losing Rs 5 lakh crore of GST because of defaults and evasions. This suggests there is clearly a need to simplify and move towards a simpler GST.
These are things the government can do in the budget to get the economy back on track. Of course, there are other things that need to be done over and above this.
We will look at these points in the next piece, which will appear early next week.
To conclude, whatever has been suggested above is pretty well known. I am not the first person to suggest these things. But as Danish philosopher Søren Kierkegaard asks in Repetition: “What would be life if there were no repetition?”What matters most is whether there is political will to go forward and implement these reforms, and to deal with nuisances that would arise as a result. On that your guess is as good as mine.
This is the second piece in a four-part series, funded by our NL Sena members. You can help fund this series by joining NL Sena today.