By DM Deshpande
We have, in India, got used to the tag of ‘fastest growing economy’ in the world. Our ruling class has taken pride, justifiably in this. But that was in the past. Things have changed for worse for the economy in recent times. And therefore, it is time to sit up and take notice.
Just a year ago the IMF expected India to grow by 7.5 per cent in 2019. Now it has cut the forecast to 4.8 per cent. If the trend is anything to go by, the picture does not seem to change for the year 2020 and 2021. Now it transpires that it is the slowest growth in the last forty years!
And the current slowdown has lasted the longest in the economic history of this nation. Even the global financial crisis did not upset the Indian economy so much. That should put things in perspective when the FM stands up to present her budget on Feb 1.
The first budget of Nirmala Sitharaman was lacklustre. However, subsequently some corrective actions have been taken. The most important among them is to lower the corporate taxes in a bold move. This presents a new tax architecture and allows corporate to come clean on their profits and other disclosures. Yet, it is only an incremental economic reform. In order to lift the economy from the rut it has got in to, more such bold measures are required and in a comprehensive manner.
Though after a considerable delay, the first step of lowering corporate taxes and bringing them on par with our peers has been done. Now it is time to look at personal taxation. Government and the FM have to look no further than their own expert committee on DTC. The latest on the subject is the recommendation of Akhilesh Ranjan Committee. Now, there is a contra view that cutting personal taxes may not really give a boost to demand. Rather, it is feared that the tax cut may just go in to savings rather than consumption. And hence, there should be not cuts in taxes.
Fiscal prudence also demands that the government does not go totally off the mark. But this is a flawed argument. One, even savings will help in boosting credit availability and investment. Investment growth has fallen to just one percent in this fiscal from around 10 per cent in the previous year. Second, this reform in DTC is long overdue; even in terms of creating a feel good factor, it can do wonders for sentiments of tax payers and markets.
There is no need to be excessively obsessed with fiscal deficit, at least for now. Extra ordinary problems need extra ordinary solutions. It is not business as usual. Fiscal prudence can be put off for the present. Yes, some belt tightening and expenditure management is called for but not cut in development expenditure. Rural spending actually has to go up in popular schemes such as MNERAGA. This will not only help arrest rural distress but will help industry broadly by shoring up demand for goods and services.
It is important to come clean on deficit numbers. Even the former finance secretary has said that the deficit is larger than reported. This will not do any good. On the contrary, it will only help fuel inflation expectations further. It is good that the government wants to disclose off budget expenses too in the coming budget. That should help a long way in establishing data credibility.
There is a credit crisis which needs urgent fixing. Whether it is NBFC’S or the rising NPA’s with banks, the fact is that credit flow has taken a beating. There is no other alternative than to resort to massive recapitalization of public sector banks and nudge and possibly provide concessions to private banks to raise capital on their own. The need to infuse capital is as urgent as what the U.S did in 2008 in the wake of financial crisis. Fortunately, required size may be much lower. Abolishing or at least substantially lowering long term capital gains
Taxes and dividend distribution tax may help remove some of the major irritants and give a real boost to markets. Government needs to stick to its disinvestment plan involving strategic sale of Air India, BPCL and others. On indirect tax front, there is a need to reverse protectionist measures. Most of our exports have an import component. Our industries have grown both in stature and confidence. All they need is fair play and predictable longer term and stable economic policies from the government. Will the government seize the opportunity afforded by the budget? Let us see, come February 1.
The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.