Expectation from the forthcoming Union Budget 2019-20 is very high for every Indian. Reviving economic growth would be a challenge for the NDA-3 government. Economists are divided in their opinions in understanding the causes and suggesting measures to lift the economic growth. Many economists believe that reviving investment climate should be the foremost priority of the government, and for that they have suggested to reduce interest rate. The underlying assumption is that the interest rate is very high which is jeopardising investment. Many policymakers also subscribe to this belief and they often argue in favour of investment incentives (mostly tax incentives) to attract investors (both domestic and foreign).
The RBI in successive monetary policies has reduced the benchmark interest rate, but the problem lies in the transmission of the interest rate cut to retail and business customers. Moreover, in the absence of additional demands for goods and services, businesses do not see any point to uptake credit and invest. Therefore, interest cut may not be an effective instrument to lift economic growth in the short run.
Another group of economists believe that government expenditures on large infrastructure projects and providing fiscal stimulus (mostly tax cut) similar to UPA-I government initiated (aftermath of the global financial crisis) may boost economic growth. These economists have diagnosed the problem correctly as they believe that there is ‘effective demand problem’ in the economy and therefore the government needs to spend more to lift economic growth. The underlying assumption of these economists is that government expenditure will trickle down in terms of wages and salaries and boost demand for goods and services over the periods.
However, it is worthy to mention that machines have replaced unskilled and semi-skilled labours in our economy to a great extent, especially in the construction sector and therefore trickledown theory may not be very effective to boost effective demand in the short run. In addition, any passing on benefits of tax cuts to consumers in terms of lower prices of goods and services and/or labourers in terms of higher wages (in case corporate income tax incidence is shifted backwards) always depends on market structure and benevolence of the businesses. Therefore as per this suggestion, Keynesian multiplier effect may not be very effective in the short run. One alternative suggestion could be cash transfers to the poor and marginal section of our society. In economic jargon, it is known as “helicopter money” (Milton Friedman, 1969). It is expected that the money so distributed will be spent on goods and services and therefore increase domestic demand and therefore investment.
At present, the question is what will be the amount required to roll out the first round multiplier impact and whether the government has the required fiscal space to accommodate the additional expenses. Main criticisms of such move are that distributed money may not be spent on goods and services but will be saved and leakages associated with money distribution. Since the money will be distributed to needy people, the question of hoarding (saving) may not be an issue. Moreover, distribution of money — through DBT platform will minimise leakage. Since the union government has already announced income support programmes for farmers (e.g., Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN)) in the Interim Budget 2019-20, the same programme may be extended to all BPL families. Even if we assume that the required amount is 2 percent of India’s GDP, it would be approximately Rs 3,43,996 crore (as GVA at basic prices of 2018-19 was Rs 171,99,815 crore).
In the interim budget, the government has announced Rs 75,000 crore for PM-KISAN for 2019-20 and therefore an additional Rs. 2,68,996 crore will be required for this programme, which is to be 15.8 per cent of tax revenue (net to centre) of 2019-20BE. To accommodate the additional expenses, the government may consider ‘expenditure switching’ first. Cutting expenditures from other heads may also help the government not to exceed the fiscal deficit target.
Alternatively, increasing ‘tax effort’ may be effective to generate the desired revenue. In a low tax compliance environment, a higher tax rate is often opted to generate desired revenue; however there is an inverse relationship between tax rates and tax compliance. Therefore, improving tax compliance rather than tax rates may be effective to generate the desired revenue. Tax compliance depends on trust between tax authority and taxpayers as well as power (deterrence) of the tax authority and finding an optimal balance between two could improve tax compliance in India. Strengthening fraud investigation in direct as well as indirect taxes and establishing an anonymous system of reporting tax frauds may improve tax compliance.
SOURCE- ET NEWS
