COMPETETIVE SPIRIT VITAL

Budget Review

 

 

By Shivaji Sarkar

 

The Central budget needs to relook at taxes and other provisions for attracting investments and steps to fight global trade tensions. The NDA-II government has none so far to fight it at home. Thus, it must strategise to increase trade, merchandise and exports amid the not-so-friendly approach of US President Donald Trump and an aggressive China.

 

Importantly, allocating lower sums, i.e. Rs 45,000 crore, for Chabahar port in Iran has its strategic cost. Tehran today needs support at a critical juncture and it cannot be allowed to drift towards Pakistan. Undeniably, Iran is a critical ally and downgrading relations with it, ostensibly under US pressure, may pose problems. As it is, it is hitting exports and making imports expensive.

 

More imagination is needed to make the budget provisions boost growth. The steep provisions on taxes are more socialistic that can cause contraction of economy. Increase in income tax, not giving relief to corporate, and applying various tolls and fees may prove to be a dampener for an economy, which is projected to grow at 7 per cent.

 

The growth rate is needed at a much higher rate. In fact, to make India a $5 trillion economy it must grow at over 11 per cent. And, even the most optimists say this requires a rate at over 8 per cent.

 

At the same time, the nation is finding it difficult to fund its programmes. More so as higher tax rate of 42.7 per cent would put more individual earners away from the market. In comparison the rate is much higher than in many competing countries in Asia and elsewhere. This would put off foreign investors as they wouldn’t like to give more in taxes as it would hit their capacity to repatriate.

 

Additionally, even Indian billionaires may move to low tax destinations be it Dubai or Singapore. And it is no secret that many have already left the country. An estimate suggests that as many as 7000 desi billionaires have gone looking for greener pastures.

 

Further, the concept of calling someone rich or super rich also calls for a review. This should be done not only on the basis of the total money one is getting, but it must be weighed in terms of erosion for continuous inflation. This has been recognised for those earning up to Rs 5 lakh, and have been given a waiver. But the benefit has not been extended beyond.

 

The tax burden is becoming unbearable. Despite GST, Indians are the highest tax payers! The total taxes paid by a taxpayer remain at 70 per cent and even those not under the I-T bracket have to shell out over 40 per cent as taxes. It will sound to reason that the highest I-T should not be over 20 per cent. For just imagine if someone having an earning of Rs 25 lakh is forced to shell out about Rs 8 lakh as taxes, would he have the capacity to do other expenditures that are necessary to lubricate the market? This is an immediate correction that is required. 

 

Worse, the government has also continued with taxing the savings. This is plain simple illogical as it is a disincentive towards savings. Let us remember that Indian families are born savers, but as a policy these are now being discouraged to save.

 

This forces the government to borrow at higher rates. And thus its latest decision to borrow from foreign markets might cause severe problems in due course of time. In fact, it may even hurt sovereign ratings. For a government that has revenue worries, domestic borrowing is cheaper and it therefore must study the market as well as some of the earlier practices. Burning the boat of savings is a costly experiment, and the nation is paying a heavy price for it.

 

Besides, the external borrowings suffer twin shocks. As soon as a sovereign government enters the external debt market, not only do the rates go up but it also hits the rupee. This means that repayments could be doubly expensive. There are other risks as well, which needs the government’s attention. The logic as of now that if the government borrows from abroad, it would leave more with the financial institutions for corporate borrowers, needs a serious re-checking.

 

Figures reveal that exports in June suffered. These fell by 10 per cent in June to $ 25 billion from $28 billion in June 2018. In rupee terms these slid to Rs 173,682 crore from Rs 187,800 in June last year. Even imports contracted to $40 billion (Rs 279, 771 crore) from $44 billion (Rs 300,352 crore), with the fall being 9 per cent. Clearly, either of this can lead to a forex crunch.

 

The government must make note that more protectionists the policies are, more would be the retribution. The US has started it and Europe is likely to follow. Fortunately, ASEAN remains lukewarm. Unless institutions such as National Savings Organisation are strengthened and bank coffers fattened with incentives for savings, the government’s revenue worries would remain.

 

Finance Minister Sitharaman can take steps to announce withdrawal of taxes on savings, as domestic savers are dealing with a twin problem. Their savings are being virtually robbed by taxes and the repo rate benefits have never been given to them. The nation may remember that domestic savings and organisations such as the LIC have been major contributors for growth and it the lopsided taxes which are causing the anxiety.

 

Interestingly, the Economic Survey is eloquent on the growth path. It says that no country had ever grown fast without buoyant exports and has called for policies to boost exports, GDP, savings and investment. Those blaming the advisers need to be cautious, as at the end the advisers are right, but were not paid heed to. So neither exports have grown for five years nor have the Indian products competitive prices.

 

Despite boasting of inching towards becoming a super power, it is a high cost, high taxed economy. Capital, land, labour, electricity, railway and air freight, road tolls and I-T are at the highest non-competitive rates. This eases inroad by countries like China, which eventually hurts the local “Make in India’ initiative.

 

Besides, as dividends are taxed high, it would be ideal recipe for the corporate to avoid its major announcements. Several other tax measures would invite tax avoidance and more stringent the laws, more would be the unfair means. And let us note that all such measures lead to reduction of money circulation. Digitisation is becoming difficult with the BSNL backbone failing, which causes a further crunch. It hits the initiative of boosting both rural and farm economy.

 

Prime Minister Narendra Modi needs to intervene. He needs to straighten the crooked lines in the budget. To make the economy competitive, he must cut down many taxes and tolls so that prices are internationally attractive for competing with the rest of the world. — INFA

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