Business News/ Opinion / Columns/  Opinion | What we want (and what we get) from the Budget

Opinion | What we want (and what we get) from the Budget

If RBI and the government keep their promises,we need not worry about inflation

Photo: PTIPremium
Photo: PTI

Ask any average middle class person what they want from the Budget and the answer is lower prices and less tax. In a way these are contradictory goals because lower tax rates could mean a revenue shortfall. A tax revenue shortfall can cause a government to borrow more, causing the deficit to increase and that could cause a price rise. Didn’t make the link? Let me try and unpack this. The annual budget presentation is a financial statement of the central government where the collection of revenues and its spending is laid out. The government gets most of its revenue from taxes (both direct and indirect) and about one-fifth from non-tax sources. Direct taxes are paid by companies and individuals under various heads (income tax, tax on house property, tax on profits and so on). Of the total revenue, income tax on non corporates (that means us) is about one-fifth of the total revenue for the year. Corporations pay a bit more than we pay. Almost half of the revenue comes from indirect taxes—it used to be excise and sales tax, but now this revenue comes through goods and services tax (GST). The shortfall in revenue over what has to be spent is called a “deficit". This deficit gets funded largely through the money the government borrows.

It matters how the government collects and spends this money and it matters what kind of a deficit it runs. India has a “progressive" tax system where the rich are taxed at higher slabs of income than those who are worse off. A fair tax system will rely more on direct taxes rather than indirect taxes because the poor pay the same tax on a product as the rich. But notice that we are collecting almost half the tax from GST and personal direct taxes are just about a fifth of the total—so there is plenty of room ahead for this to change. It is in the spending of this money that the state lays out its priorities. It is not that different from our annual spends and what they say about our choices. Are we spending more on keeping fit or on doctors’ bills? Are we spending on building assets or on current consumption? And this leads to the kind of deficit the government runs. If the government borrows more for current consumption or hand outs and not building assets, the deficit is said to have a negative impact on the economy. Look at this as a credit card debt you roll over to finance a holiday or a gadget versus a home loan that builds a long-term asset. The first debt is a drain on your finances but the second one has the capacity to generate a return (or revenue) at a later date. When governments, especially before an election, spend a lot of money without having it on social schemes or freebies aimed at bribing people to vote them back into power, the impact is usually inflationary. The shortfall of revenue over government spend is made good by borrowing or printing currency. Governments can “monetise" their debt when they can’t borrow anymore from the market by printing currency. This practice has been frowned upon and discontinued in many parts of the world. But innovative central bankers have found ways to “monetise" debt through the back door. Whichever way debt is monetised, it causes a rise in prices—or inflation.

Circling back to where we started from—it is possible for lower tax rates to be inconsistent with lower prices in some situations. As citizens, we wish for a kinder tax regime, lower prices, more roads, better railways, airports, hospitals, education, cleaner air and water. But all this costs money. The government needs tax revenues to be able to spend more. But we, the same citizens who want more infra and better government services, don’t like to pay taxes. Out of 1.2 billion Indians, only about 70 million pay taxes. And fewer than 100,000 Indians declare an annual taxable income of 1 crore or more. When more of us pay our income taxes, there is a chance that tax rates will come down. But till then, there is very little space for a major reduction in tax rates on income taxes in India. What about price rise? Do we get some relief there at least? There are two things that should keep prices in a certain band in India. One is an inflation targeting central bank and the other is the commitment by the government to keep deficits in control. The Reserve Bank of India is now committed to keeping inflation within a band of 2% to 6%. The government is committed to keeping the fiscal deficit under 3%. If both the institutions keep their promises, then we don’t need to worry about the kinds of inflation we have faced in the past. But to get to lower taxes, more of us need to pay our taxes.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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Updated: 29 Jan 2019, 10:55 PM IST
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