A wishlist for Budget 2017

The challenge for the Finance Minister in 2017 is to improve the quality of government expenditures. The present drive of demonetisation and towards cashless economy will lead to more transactions coming into the tax net. This will lead to a higher tax burden on the people. Lesser money will remain in the hands of the people and more money will come into the hands of the government.

A person with an income of Rs 10,000 per month was, say, paying tax of Rs 2,000 earlier. He will now pay taxes of Rs 2,500 because more of his purchases will be of tax-paid goods. He will be poorer by Rs 500. The reduction of money in hands of the people will lead to a reduction in demand for goods in the market. This will have a negative impact on the economy.

However, the final impact will depend upon how the government uses the additional revenue that is collected. This money can be used by the government in two ways: for increasing government investments in infrastructure such as railways and highways, or for increasing government consumption such as by providing higher salaries to government servants. The implementation of the recommendations of the Seventh Pay Commission and One Rank One Pension has led to increased consumption by government servants.

This will lead the economy into the dumps because government servants are well paid and will not spend their incomes in buying goods from the market. They will buy gold from part of this income. The money will go to South Africa or Russia from where we import gold. Indian economy will deflate like air being leaked from a balloon. There will be less demand in the economy. The Finance Minister must instead use this additional revenue for the development of roads, sewage, electricity supply and net connectivity in villages and small towns.

These investments will help the people earn more and neutralise the impact of the higher tax burden. A person with an income of Rs 10,000 per month previously will now earn Rs 12,000. He will still be richer after paying higher taxes due to demonetisation. The increased income in hands of the people will lead to an increased in demand for goods in the market. They will also generate demand for cement and steel because people will pay higher toll tax for the use of highways.

This demand will neutralise the negative impact of bringing more transactions in the tax net. The small industries were undertaking most transactions in cash until now. They will come under the tax net. Their cost of production will increase. They will find it difficult to compete with large industries. The small industries generate most employment in the country. Therefore, there is a need to neutralise the additional tax burden imposed upon them. The basic Income Tax slab at present is Rs 2.5 lakh.

The Finance Minister should provide an exemption of, say, Rs 7.5 lakh in income tax for self-employed incomes. The exemption from excise duty should also be raised substantially from the present Rs 1.5 crore to, say, Rs 5 crore. The requirement of maintaining accounts for small businesses must also be loosened. This will make it possible for small industries to survive in a cashless economy. It will also provide encouragement to professionals to start their own businesses such as providing tuition to foreign students over the internet.

These steps will undo the problem faced by small businesses due to demonetisation. The increase in the price of crude oil will lead to higher outflow of monies from India and dampen our economy. The way out is to move towards less energy intensive modes of earning and living. Investment in public transport like Metros must be increased substantially. The import tax on crude oil must be increased so as to reduce consumption. Let petrol be priced at Rs 125 per litre.

Those using bikes and scooters should pay more. We must develop the services sector, which consumes less energy, as the main engine of economic growth. We must go slow on manufacturing, which consumes about ten times the energy as compared to the services sector. This approach will help contain our oil import bill. Therefore, we must reduce the rates of service tax and increase the rates of excise duty. The GST seeks to move in the opposite direction. The rates of excise duty are high at present. They are set to be lowered.

The rates of service tax are low at present. They are set to be increased. There is a need to provide a lower rate of tax for services under the GST. The Indian economy has been driven by foreign investment in the last 25 years since Manmohan Singh unleashed the economic reforms. However, the globalisation juggernaut is slowing down now. Brexit and Trump are the flag-bearers of the anti-globalisation movement.

Therefore, we must go into reverse gear proactively. We must scrap or modify all double tax avoidance agreements as we have done with Mauritius, Cyprus and Singapore. We must also re-impose restrictions on outward flows of money from the country that have been liberalised in the last two years. The Finance Minister must take Indian businessmen into confidence and try to keep Indian capital within the country.

Running after foreign capital will not do when our own businessmen are trying to exit India and invest abroad. Foreign investment will come only if domestic investment is strong. The non-performing assets of the public sector banks are a drag on the economy as are a host of other public sector undertakings. The NDA-I Government had taken a bold step towards strategic disinvestment.

NDA-II must follow that approach instead of trying to revive the PSUs. The Finance Minister should go for strategic disinvestment of all PSUs, including banks. Only PSUs in sensitive areas must be kept under government control. The five steps I would like the Finance Minister to take are.

1. An increase in the use of government revenues for improvement in infrastructure in small towns 2. Provision of a hefty exemption from income-tax for self-employed persons 3. A reduction in the rates of service tax. 4. Reduction in the limits for outward remittances. 5. Strategic disinvestment of all PSUs, including banks. These measures will surely lift the economy. Author was formerly Professor of Economics at IIM Bengaluru

By Dr Bharat Jhunjhunwala