Opinion | Sitharaman’s mood boosters have left a lot to be desired4 min read . Updated: 01 Feb 2020, 09:48 PM IST
The adjustment in fiscal deficit, for instance, is far too small to even cover the Centre’s unpaid dues, let alone drive growth
The key feature of Union Budget 2020 that will dominate the headlines is the reduction in personal income tax rates such that the highest marginal tax rate of 30% will apply only to incomes above ₹15 lakh. Exactly like the corporate tax rate reductions of September 2019, these lower rates are offered to taxpayers not choosing to avail of the deductions they were accustomed to. In a somewhat confusing clarificatory paragraph, it would appear that some deductions still remain even for those opting for the new lower rates. The situation will become clearer only after combing through the small print of the Finance Bill. The lower personal tax rates are a clever move in a situation where the tax-paying middle class—however small it might be from an electoral perspective—was feeling neglected, strung between the concern for rural India at one end, and that for big business at the other.
However, from the perspective of what was needed for an economy growing at 5%, it was widely agreed that the fiscal deficit limits sanctioned by the latest Fiscal Responsibility and Budget Management Act could be disregarded in view of the severity of the slowdown.
Even the magisterial pronouncements of the International Monetary Fund sanctioned crossing those limits, so long as a commitment to medium-term fiscal prudence was visible. What we got was an upward nibble of half a percentage point for both 2019-20, the current fiscal year, and 2020-21, using a trigger provision in the Act to justify structural reforms. This adjustment is not enough even to cover promised but unpaid dues, such as those to farmers under the Pradhan Mantri Kisan Samman Nidhi programme, which has been commended in all quarters as an income and consumption boosting transfer to sections where the marginal propensity to consume is high, and not eroded by a high marginal propensity to import. Dues to state governments in respect of goods and services tax (GST) compensation have also been known to be withheld. These are just the known unpaid dues. A number of others too numerous to mention lie hidden in fiscal crevices. On GST compensation, states have fretted over non-receipt of their promised dues under the GST Compensation Act. Paragraph 107, perhaps the most confusing in the speech, says: “It is decided to transfer to the GST Compensation Fund balances due out of collection of the years 2016-17 and 2017-18, in two instalments. Hereinafter, transfers to the fund would be limited only to collection by way of GST compensation cess." As GST came in only on 1 July 2017, the two reference years are presumably 2017-18 and 2018-19. The problem of unpaid compensation transfers arose largely in the current year, 2019-20. As these dues to states are a statutory obligation and have remained unpaid because they have outpaced collections under the cess, limiting transfers to cess collections will constitute a statutory violation, unless the Compensation Cess Act is amended. A lot of measures, such as the removal of the dividend distribution tax (DDT) and replacement by taxation of dividends in the hands of recipients, were merely a restoration of the situation that existed 20 years ago. That story is too long to be repeated here, but the DDT was an attempt to capture tax more efficiently at source than after disbursal. It is unlikely that this measure would improve the corporate propensity to invest. Another such mood-lifting attempt was the extension of the concessional corporate tax rate of 15%, applicable to new manufacturing units, to power generating companies. That will do nothing to attract new power generation capacity. What holds back potential power generating companies is the financial situation of distribution companies (DISCOMs) and their repeated failure to buy power contracted for on account of their poor financial situation. Paragraph 58 even acknowledges that DISCOMs are under financial stress. However, the solution that it offers is that states will be urged to introduce smart prepaid metering, whereby consumers can choose between suppliers. How will that solve anything? It will only serve to plunge DISCOMs further into the red. There were a few good nuggets lost in the midst of verbiage so voluminous that the finance minister was unable to complete her speech even after having spoken for 2 hours and 45 minutes. The best was an acknowledgement of the working capital problem faced by small enterprises on account of delayed payments, and the intent to enable non-banking financial companies to extend finance by discounting payment dues. If the announced intent to amend the Factoring Regulation Act of 2011 is acted upon, such that enrolment by large corporates on the Trade Receivables Discounting System is enforced, and penalties levied for refusal to engage on that platform, that in itself will remove a major impediment to financing faced by small enterprises, on whom our hopes of growth and employment are pinned. However, the plan to let banks provide subordinate debt to them in the form of quasi-equity will pile up non-performing assets. The intention to make states implement the Model Agricultural Land Leasing, Marketing and Contract Farming Acts is a good start to agricultural reforms. How states will be so incentivized was left unsaid. The budgetary commitment to the Infrastructure Pipeline announced in December was quantified in paragraph 103 at ₹22,000 crore, expected to be leveraged by infrastructure funds to a total of ₹1 trillion. That was disappointingly small. Disinvestment, on the other hand, was budgeted way too high at ₹2.1 trillion. How that will be achieved was also left unsaid. Also left unspecified was what the Fifteenth Finance Commission had recommended for transfer to states.
Indira Rajaraman is an economist.