A fiscally prudent budget is an important aim but the government must create fiscal space for growth-boosting expenditure.
Shift in Priorities – a Productive Workforce and Competitiveness of Indian Products & Services
Fiscal prudence, along with the implementation of difficult reforms to modernize the economy, has been the hallmark of this government. In its third term in power, it could further focus on some of its priorities, such as a productive workforce and the competitiveness of Indian products and services. The Union Budget will need to create fiscal space for supporting these priorities while at the same time continuing with fiscal consolidation. The Confederation of Indian Industry (CII) has made its recommendations keeping these priorities in mind.
A Robust Fiscal Framework
For fiscal consolidation, the practice of publishing deficit indicators for the medium term in the Union Budget should be revived, offering medium to long-term visibility on the government’s fiscal planning. The Fiscal Responsibility and Budget Management Act could also be reviewed and updated, as suggested by the 15th Finance Commission. A robust fiscal framework would be positive for India’s credit rating. The recent upgrade in S&P’s outlook for India’s credit rating was based on the country’s robust economic growth, significant enhancements in the quality of government expenditure and the administration’s commitment to fiscal consolidation.
Enhancing Critical Expenditure
While pursuing fiscal consolidation, the government needs to enhance its expenditure in critical areas which would boost productivity. The need of the hour would be to boost the country’s focus on health and education by increasing public spending on schools/colleges and hospitals. CII has recommended that the combined (Centre plus states) expenditure on healthcare be stepped up to 3% of GDP by 2030-31, while spending on education be increased to 6% of GDP. This would not only make people’s lives more comfortable, but also improve productivity across the economy.
Strategic Use of RBI Dividend
As far as budget calculations go, a choice of consolidation versus spending has received much attention in view of the windfall received by the government in terms of a large dividend from the Reserve Bank of India. A dividend of INR 2.1 trillion received in May 2024 has significantly eased the government’s fiscal constraint for the fiscal year 2024-25. CII has recommended that a part of this windfall be used for boosting capital spending by 25% over the revised figure for 2023-24. This would help maintain the upward trajectory of public capital expenditure and help crowd in private investment.
Disinvestment and Asset Monetization
The government may look at raising money through disinvestment and asset monetization. It is likely that setting an achievable target is difficult, since the outcome is dependent on market forces that are not always predictable, CII has therefore recommended that a demand-based approach be followed for the selection of public sector enterprises (PSEs) to be divested by the government. Based on investor interest, the government should come up with a medium-term schedule for PSE disinvestment, say for the next three years.
The government’s asset monetization programme can be intensified by providing support to ministries and state governments on aspects such as identification of assets, regulatory design and execution. A dedicated cell either in the Niti Aayog or Ministry of Finance can be set up for this purpose. The receipts from disinvestment and asset monetization should be used to either retire debt or create new assets.
Enhancing Tax Collections
To create fiscal space for stepping up expenditures on critical areas, the government will need to enhance tax collections. As a proportion of GDP, the Centre’s gross tax revenue has remained around 11.5% for the last four years. According to the 15th Finance Commission, India’s total tax collections (Central and states combined) are around 4 percentage points below their potential. The time is now ripe to increase tax buoyancy through rationalization and simplification of the tax structure, wherever possible.
Simplifying GST
Since its introduction in 2017, the Goods and Services Tax (GST) has considerably simplified the tax structure by using the principles of ‘One Nation, One Tax’. However, this tax regime is still beset with a plethora of rates and exemptions, leaving considerable scope for simplification. CII has recommended a move towards a three-rate structure along with a moderation in rates. Also, goods and services that are currently outside the ambit of GST, such as petroleum products and electricity, should be brought in. Given that these are widely used inputs, the availability of input credit would immediately reduce the cost of doing business.
While the Union Budget cannot implement GST reforms, it can give directional guidance to the GST council on this issue. These actions would go a long way in preventing leakage and ensuring buoyancy of revenues.
Simplifying Customs Tariffs
Also, in need of simplification are India’s customs tariffs, which need to move to more competitive levels. CII has recommended that a graded roadmap be announced to rationalize duty rates over time, so that domestic manufacturers have time to adjust. Further, continuous improvements are required in compliance procedures as well as dispute resolution, and grievance redressal. Measures to facilitate the ease of doing business along with simplification of tax structures would greatly improve tax buoyancy.
Following the surge in government expenditure during 2020-21, when the country was affected by the COVID pandemic, the government has had its task cut out in getting the fiscal deficit in control. Indeed, it has made remarkable progress in reducing the fiscal deficit from 9.2% of GDP in 2020-21 to 5.6% in 2023-24, a reduction of 3.6 percentage points in a matter of three years.
Going forward, a considered view needs to be taken on the pace of deficit reduction, so that the country’s need for fiscal consolidation is balanced with the need to support economic growth. efforts do not hamper economic growth.
This article was written by Mr Chandrajit Banerjee, Director General, the Confederation of Indian Industry. It was first published on 8th July 2024 in Mint.
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