Focus on tax and spending reforms in FY25 budget: Bibek Debroy

The full-year budget, to be presented in Parliament after the national elections, will likely focus on expenditure reforms and encourage businesses and individuals to shift to the new simplified and exemption-less tax regime, said Bibek Debroy, the chairperson of Prime Minister Narendra Modi’s Economic Advisory Council (EAC-PM). 

In an interview, Debroy said by the time the full-year budget is presented, the terms of the Sixteenth Finance Commission to decide on the sharing of the Centre’s divisible pool of taxes with states for the five years from 2026-27 will come out, indicating overall expenditure reforms needed at central and state levels. India’s economy is expected to grow in the range of 6.5-7% in the medium term, Debroy said. Edited excerpts:

While government expenditure is working as a growth engine, other growth drivers like private investment, consumption and net exports have some weaknesses. In that context, what should be the broad issues that the next Union budget should address?

It is a question that cannot really be answered. One reason is the moment you say what the budget should concentrate on, you are implicitly suggesting that whatever the budget concentrated on earlier was wrong and, therefore, something else should be concentrated on. But budgets have been a continuous process. So, it is not that you should expect something completely new to happen. It will be incremental. 

The second reason why I think it is the wrong question to ask is, we, of course, do not know what the electoral cycle will be…depends on the Election Commission and on everything else. But if you project on the basis of whatever one can reasonably hazard a guess about, it is not going to be a full budget. It will be a vote on account. A vote on account obviously means it is essentially a statement of receipts and expenditures. You are not going to vary taxes. 

When it comes to the next budget, whenever it is, in addition to what I said about the incremental (nature), I think the two things that will stand out are what is done on direct tax reform—indirect tax is essentially (with the) GST Council, and expenditure reform.

Direct tax reform, again, as you know, there are, so to speak, two channels. One is without exemptions, and the other is with exemptions. Both channels exist for the corporate sector as well as for personal income tax, and personal income tax does not imply just the salaried people. Any unincorporated business is also part of that. So, one needs to incentivize the movement towards an exemption-less system both for personal income tax as well as for corporate taxation.

We find that on the personal income tax side, a lot of people have opted—I believe the figure is about more than two-thirds have opted for the exemption-less scheme, not so much on the corporate side. So, direct tax reform, to me, will fundamentally be about this, and that is linked to rates and stuff like that. One element is this. The second element is expenditure. When I say expenditure, I do not exactly mean expenditure by the Union government. It is expenditure across governments. There is expenditure that is linked to legislation that needs to be reformed.

As a society, we need to reform the way states spend and what they spend on. By the time the next budget happens, we will probably have the Sixteenth Finance Commission. We will probably also have the terms of reference for the Sixteenth Finance Commission. So, the moment we have the terms of reference, we will have some indication of what the government intends to do in terms of broad expenditure reform, not just of the Union government, but all governments.

The Fifteenth Finance Commission had favoured more freedom to states on spending the tax revenue devolved to them by the Centre. Should that idea be reviewed?

Every finance commission decides on a vertical share (of tax revenue between the Centre and states), and it decides on a horizontal share (sharing of revenue among states). State finance commissions are equally important, and they are supposed to enable the devolution of funds to the local bodies. The Union government has always implemented the recommendations of the Union finance commissions. There was one occasion when there was a minority report, when the minority report was implemented, but the Union finance commission recommendations have always been implemented. How many recommendations of the state finance commissions are being implemented?

What are the medium-term economic growth prospects for India?

India’s real GDP (gross domestic product) growth trajectory is expected to be 6.5-7% in the medium term. If the external world had been absolutely fine, we would have said perhaps our growth rate would be 8.5%. It is not that India is insulated from the uncertain global environment. It affects us in many ways. It causes volatility in foreign exchange and capital markets, and of course, it affects the export of goods and services. 

Since the external world is not fine, I am looking at somewhere between 6.5-7% growth. The Union government’s capital expenditure has been pretty significant, and despite fiscal consolidation requirements, the Centre’s capital expenditure will continue. There are signs of consumption picking up. Sometimes, both consumption and private investments are postponed if there is uncertainty, but because the union government’s policies have been fairly clear, despite what is happening around the world—there will always be some uncertainty—the indications are that both consumption and private investments have begun to pick up. 

I should also quickly flag that although the production-linked incentive (PLI) scheme has not been in existence for a long enough period of time to do a proper statistical analysis, there is evidence that India is now becoming part of global supply chains in manufacturing. We are not dismissing what is happening in the rest of the world, but we subscribe to the view that given what is happening in the external world, India is not doing that bad, including on inflation.

We are looking at the manufacturing sector for job creation, but it is becoming less labour-intensive and more automated, reducing its ability to absorb workers. Your comments?

At one level, these are artificial national income accounting constructs. When you say manufacturing, you are essentially using the word manufacturing in the sense of something like the National Industrial Classification. When I say modern manufacturing is capital intensive, it is that narrow thing.

But once the manufacturing happens, there are a whole range of services which are not manufacturing from the point of national income accounts, which are also created. So, the direct employment creation of manufacturing may not be that high, but the indirect employment generation of manufacturing, which is difficult to capture and quantify, is perhaps three times the direct one.