IIMK

Pre-Budget Analysis at IIM Kozhikode; Panelists Propose Wish-list

Kochi: IIM Kozhikode’s (IIMK) campus in Kochi conducted a pre-Union Budget 2017 panel discussion on the theme, ‘India – An emerging economic powerhouse: Policies to boost competitiveness’.

The panelists included senior economists and public policy experts like Dr.  V. B. Athreya (Economist and Advisor, M.S. Swaminathan Research Foundation), T K Arun (Editor – Opinion, The Economic Times), Gajendra Haldea (I.A.S Former Advisor – Infrastructure & PPP to the Planning Commission) and. Ramana Kumar B (Founder, Ovopax Legal CA, Direct Tax Professional). Dr. Rudra Sensarma, Professor of Economics at IIMK, moderated the discussion.

Prof. Rudra Sensarma, Professor of Economics, IIMK, elaborating on the key topics for the panel discussion, noted that the two major reform periods (separated by 25 years) is being discussed viz., reforms in the year 1991 followed by the current government’s move for demonetization.  However, he also noted that that the devaluation of currency happened in 1966-67 which is 25 years earlier to 1990-91. This may also mean that Indians can probably breathe easy for another 25 years.

Some of the broad points discussed by eminent panelists were avenues to recover and grow the Indian economy from the effects of demonetization, tax reforms, enhancing public expenditure, financial stability, stressed assets in the banking system, doubling agriculture income and so on. The deliberations were on how India is at the crossroads of an economic power-house in the making. The panel elaborated on policy measures which will accelerate India’s growth to be one of the emerging economic powerhouses.

Gajendra Haldea, at the session, spoke from a macroeconomic perspective and highlighted the robust and resilient growth trajectory of Indian economy. He said, “The reduction in government spending as a proportion of GDP during the last decade is due to enhanced private sector investment.” In order to make growth sustainable and to fund higher planned public expenditure, policy makers must devise policy and institutional arrangements to enhance private investments.

Given the rise in stressed assets in the banking system coupled with the large quantum of resources needed for banks’ recapitalisation, Haldea expected that capital formation will not improve much in the short run and the direct impact of this will be felt in infrastructure investments. These issues have to be addressed by sustained government policies aimed at creating an environment of trust to encourage private and foreign investment. These measures would free precious government resources for utilization in welfare oriented investments programs viz. creation of rural employment opportunities, health, education etc. He emphasized that this budget should come up with actionable policy measures to achieve the stated goals of doubling agriculture income, increase in manufacturing activity, investment in infrastructure etc. However, he cautioned that in view of the elections in five states, one may expect populist measures to alleviate the pain caused by demonetization rather than what is needed for the economy.

T K Arun argued for enhanced public expenditure through reining in fiscal deficit.  Over the last 2 decades, taxation revenue has become more balanced between direct and indirect taxes. Hence the government must focus on reforming tax administration. At the same time, policy makers should focus on attracting foreign investments by committing to a credible Indian growth story. This can be done by addressing issues related to project implementation, regulatory and judicial mechanism, and corruption leakages. A significant step towards this would be by regulating funding of political parties. He further added, in a globalized world, for sustaining growth and development, there is a need to ensure financial stability by reducing the exposure to foreign exchange fluctuations.  The proportion of stressed assets in the banking system is very high, 12% which itself is an understatement ‘Ever greening’.

To overcome this, TK Arun said that the policy makers need to ease the process of liquidating bad assets by activating the insolvency and bankruptcy code. These policy measures would lay down the exit process for liquidating stressed assets out of the ‘Chakravyuha’. In the absence of these measures, the banking system would be reluctant to lend. This combined with piling up of deposits would add further stress to bank’s profitability. Given the green shoots visible in the reviving global economy, this budget should balance public expenditure with fiscal prudence by ensuring financial stability.

Prof. Venkatesh Athreya started by saying that budget is one of the several policy instruments and numbers quoted in the budget are estimates and it gets revised. Given the distribution of assets in the economy, those who are economically powerful have a much powerful influence on public policy. Budget will more likely to reflect their interests. He listed the constraints by detailing how the world economy has a great influence on our national economy. He also expressed his doubts on whether the government would increase public expenditure.  He recommended increase in budgetary outlays focusing on creating physical and social infrastructure. In order to raise resources he recommended a more transparent tax regime in general and an enhanced direct tax collection in particular through reduced exemptions and/or higher tax rates. Further to ensure compliance, he recommended implementation of GAAR targeting big businesses.

The successive government in the center has reduced the fiscal space available to the states, have relegated a lot of fiscal space to the centre, a trend which would continue with implementation of GST.  Prof. Athreya recommended a more democratic decentralized approach, right down to elected local bodies and more balanced centre state financial relationship and devolution of more funds to local bodies. Given the recent history, Prof. Athreya expects a lot of rhetoric, but very little action to stimulate the economy with greater allocation to agriculture, infrastructure and health but was skeptical, if it will happen in this budget.

Ramana Kumar was of the opinion that demonetisation, irrespective of whether it’s good or bad, is a given. The forthcoming budget should address avenues to recoup from the effects of demonetisation. He touched upon the following; 1) Presumptive taxes and tax audit limit: As a measure to soothe the effect of demonetisation on SME’s presumptive taxation rates were recommended to be dropped from 8% to 6% or low. 2) Increase the tax audit limit to 3 crores from 1 crore. As lowering of IT rate, historically have seen lower tax rate bringing more compliance and more revenue. 3) Globally tax rates are comparatively low averaging from 15% to 25%. India’s high rate needs to be brought down to around 25%.

Kumar stressed on a number of tax reforms such simplification of tax rules 80JJAA as it is one of the most underutilised sections with a direct impact of increased job opportunities, tax reforms to promote research and transfer of technology, removal of MAT, more tax reforms for the manufacturing and agriculture sector as they are the backbone of the economy. He also said, that, in order to increase the personal income tax collection and widening the tax base, this budget should not focus on increasing the exemption limit from 2.5 lakhs, rather it should reintroduce standard deduction and enhanced rebates. Introduction of a new tax resolution system in India to enhance the ease of doing business as well as to reduce the stress on dispute resolution, a simpler tax resolution mechanism were some of the recommendations.

In order to alleviate the impact of demonetization on SME’s, the budget should enhance the threshold of GAAR from 3 crores to a higher limit. The budget should not reintroduce long term capital gain tax, the current security transaction tax mechanism should be continued. Cesses and surcharges are levied under exceptional circumstances. However, this has become a matter for routine for all the government. Ramana recommended removal of all cess and surcharge and include the same in the tax structure.