The central budget needs a relook at taxes and other provisions for attracting investments and steps to fight global trade tensions.
The NDA 2 government has none to fight at home. It has to strategise to increase trade, merchandise and exports amid not so friendly approach of US President Donald Trump and an aggressive China.
Allocating lower sums – Rs 45,000 crore – for Chabahar port in Iran has its strategic cost. Iran needs support at critical juncture. It cannot be allowed to drift to Pakistan. Iran is a critical and crucial ally. Downgrading relations, ostensibly under US pressure, may pose problems. 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 various tolls and fees may prove to be a dampener for an economy that is projected to grow at 7 percent.
The growth rate is needed at a much higher rate. To make it a $ 5 trillion economy it has to grow at over 11 percent. The most optimists say it requires a rate at over 8 percent.
The nation is finding it difficult to fund its programmes. More so as higher tax rate of 42.7 percent would put more individual earners away from the market. The rate is much higher than in many competing countries in Asia and elsewhere.
It would put off foreign investors. They would not like to give more in taxes as it hits their capacity to repatriate.
Even Indian billionaires may move to low tax destinations be it Dubai or Singapore. Many have left the country. One estimate says that 7000 desi billionaires have gone looking for better pastures.
The concept of calling someone rich or super rich also calls for a review. It should be done not only on the basis of the total money one is getting. It has to be weighed in terms of erosion for continuous inflation.
This has been recognised for those earning up to Rs 5 lakh, who have been given waiver. But the benefit has not been extended beyond. The tax burden is becoming unbearable. Despite GST, Indians are the highest tax payer. Total taxes paid by a taxpayer remains at 70 percent and even those not under the I-T has to shell out over 40 percent as taxes. Highest I-T should not be over 20 percent.
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 needed.
The government has also continued with taxing the savings. It is illogical. It disincentivises savings. Indian families are born savers. As a policy Indians are being discouraged to save.
It forces the government to borrow at higher rates. The latest decision to borrow from foreign markets might cause severe problems in the course of time. It might even hurt sovereign ratings.
Domestic borrowing is cheaper for a government that has revenue worries. It has to study the market and some of the previous practices as well. But burning the boat of savings is a costly experiment. The nation is paying a heavy price for it,
The external borrowings suffer twin shocks. As a sovereign government enters the external debt market, rates go up. Besides, it hits the rupee. This means the repayments could be doubly expensive. There are other risks as well. The government needs to review it.
The logic that if the government borrows from abroad, it would leave more with the financial institutions for corporate borrowers needs rechecking.
Exports in June suffered. It fell by 10 percent in June to $ 25 billion from $ 28 billion in June 2018. In rupee terms it slid to Rs 173,682 crore from Rs 187,800 in June 2018. Even imports contracted to $ 40 billion (Rs 279, 771 crore) from $ 44 billion (Rs 300,352 crore). It is a 9 percent fall. Either of this can lead to a forex crunch.
More protectionists are the policies more would be retribution. The US has started it, Europe is likely to follow. The ASEAN remains lukewarm.
Unless institutions like National Savings Organisation are strengthened and bank coffers fattened with incentivisation of savings, the government’s revenue worries would remain.
Off budget, the finance minister can take steps to announce withdrawal of taxes on savings. Domestic savers are having a twin problem. Their savings are being virtually robbed by taxes and the repo rate benefits were never given to them. The nation may remember that domestic savings and organisations like LIC have been major contributors for growth. Lopsided taxes are causing anxieties
The Economic Survey is eloquent on the growth path. It says that no country had ever grown fast without buoyant exports. It called for policies for cycle of boosting exports, GDP, savings and investment.
Those blaming the advisers need to be cautious. The advisers are right. They were not given a heed. So exports have hardly grown for five years. Indian products do not have competitive prices.
Despite boasting to inching to be a super power, it is not so. It is high cost, high taxed economy. Capital, land, labour, electricity, railway and air freight, road tolls and I-T are at the highest incompetitive rates.
This eases inroad by countries like China. That hurts local – make in India – initiative.
As dividends are taxed high, it would be recipe for the corporate avoid its announcements. Several other tax measures would invite tax avoidance. More stringent are the laws, more would be unfair means.
These measures lead to reduction of money circulation. Digitisation is becoming difficult with BSNL backbone failing. That causes further crunch. It hits the initiative of boosting rural and farm economy.
Prime Minister Narendra Modi has to intervene to straighten the crooked lines in the budget to make the economy competitive by cutting on many taxes and tolls so that prices are internationally attractive for competing with the rest of the world.