In her pre-election, no-frill budget in February, Finance Minister Nirmala Sitharaman stayed away from populism. But as part of the new coalition government, will her seventh budget jump on the populism bandwagon or stay focused on the growth path? We will know only when she unwraps the red cloth folder on July 23.
The electorate's disenchantment over price rise, unemployment and slow growth in salary income combined with the pull of coalition politics could determine the course of this government's financial plan. However, here are some pragmatic proposals which can have an immediate impact on inflation, improve the government's financial position and spur the country's growth engine:
Reduce excise duty on petrol & diesel: A cut in excise duty on petrol and diesel will have cascading positive effects – it will stem the price rise and a lower inflation could prompt RBI to cut rates. This, in turn, could reduce the cost of borrowing, especially for retail loans as they are linked to the repo rate. This is especially important at a time when the central bank itself is worried about household indebtedness. The dividend of Rs 2.10 lakh crore from RBI will surely help FM reduce taxes without upsetting the budget math.
Paring public sector bank stake: The Union government had infused trillions of rupees as capital into PSBs following the asset quality review of 2015 and the subsequent rise in bad loans. Now that their NPAs are at multi-year lows and profits are high, it is time for the Centre to extract its pound of flesh by bringing down the stake to 75%. Privatising them may not be possible. Retaining only three-quarters of the stake is not only practical but also necessary to comply with SEBI's public shareholding norms. When the markets are booming, there is no better time to do it than now.
Status quo on corporate taxes: Corporate income tax (CIT) rates are lower than personal income tax rates (PTI). After the release of the data of tax collected for the first quarter of the current year – where the CIT share was at 38% and PIT share at 62% – the clamour for slashing the personal tax has increased. However, raising the CIT would impact our global competitiveness and India's ability to attract foreign investments. Higher taxes on businesses would bring down the profit, ultimately hurting the retail shareholders.
Reduce indirect taxes: While a reduction in personal I-T rates could give the government an image boost, it can make a real impact by reducing the rates of indirect taxes. This is because only a minority, and a relatively better-off minority at that, pay income tax in India. Some reports say that only 2.2% of India's earning citizens pay income tax. Rather than cajoling more people to pay I-T, the finance minister should focus on reducing indirect taxes which will benefit a larger share of the population, such as GST reductions on two-wheelers (taxed at 28%, as if they are luxury goods) and on health insurance premiums through the GST Council.
Hike in specific IT deductions: The premium for medical insurance under Sector 80D has a cap of Rs 25,000 which should be doubled considering the rise in healthcare costs post COVID. Also, Section 80C deduction for life insurance premiums should be made available only for term life insurance policies, which are pure cover policies. This should put an end to the massive mis-selling of non-term policies, that neither provide sufficient insurance coverage nor give attractive returns.
PM KISAN scheme: Farmers receive input subsidies for power and fertilisers. To reduce the dependence on government payout, these funds should be brought down gradually and an equivalent amount should be paid as enhancements under the PM KISAN scheme. Income transfers could help farmers diversify into crops with higher income, stop the overuse of power and water and improve soil nutrition.
The road to Viksit Bharat by 2047 is long and challenging. However, the policy choices for that journey are not so obvious. FM is sure to offer some clues as to those ideas this Tuesday.
(The writer is an ex-banker and currently teaches economics & finance.)
