Government should lift the conventional veil of secrecy in Budget-making : 16-09-2019

Last Saturday, finance minister Nirmala Sitharaman virtually doubled as commerce minister to unveil a mini-foreign trade policy to boost sagging exports. Overhauling of the tax refund scheme for exporters and revising priority sector lending norms for export credit are pragmatic. But export growth is contingent on the pace of global recovery, amid trade tensions, and increased export competitiveness.

Nirmala Sitharaman also announced a Rs 10,000 crore special window to provide funding to affordable and middle-income housing projects that are stalled. But such projects should not have defaulted or moved to the bankruptcy courts for resolution. Infusing long-term funds into viable projects whose funding has been disrupted would have signalled bolder action to spur the housing sector.

EqEqual Weekly Instalments
GoI hopes the series of post-Budget policy moves will help the economy rebound. Course corrections have come in dribs and drabs, with Sitharaman saying that measures are being announced in tranches based on cross-sectoral feedback.

Surely, wider consultations enable policymakers to think-through the implications of Budget proposals: be it slapping a surcharge on foreign portfolio investors, levying an angel tax on startups, or raising some of GoI’s borrowings abroad. Budget 2019 was constrained by time and, hence, limited pre-consultations. Key tax proposals were later withdrawn. The economy now needs a huge spending boost to fight the slowdown. And that can’t wait till Budget 2020.

But preparation for the next Budget must start in earnest with wider discussions. GoI should seriously consider introducing a pre-Budget statement disclosing the broad contours of its fiscal policies, anticipated receipts and expenditure, and how much it needs to borrow from the market.

A suggestion to this effect was made in 2018 by the International Budget Partnership that conducts an independent global survey on Budget transparency once in two years. Publishing a pre-Budget document  is in step with what over 50 countries follow. It will improve transparency and help evaluate measures better. States can take a page from this book too.

Last week, for instance, Telangana chief minister K Chandrashekar Rao slashed the state budget, blaming the current economic slowdown. But lowering capital spending needed to create assets, and revenue spending used to build human capital through education and healthcare would be counterproductive. So, states must spend productively to grow during a slowdown.

The Budget assumes a particular rate of economic growth. If that rate is not achieved, tax collections will naturally be depressed and state budgets, predicated on devolutions pegged to the assumed rate of economic growth and resultant tax collections, will go awry too. In such a case, should the Centre compress expenditure to meet the preset fiscal deficit target as a proportion of GDP or meet the expenditure target in rupees through extra borrowing, so that the economy gets a boost? There has to be clarity on the fiscal stance.

In the US, the Congressional Budget Office estimates the implication, direct and indirect, of any proposal, & quantifies the net gain or cost. Rigour and transparency stand out in this exercise. As most state and central budgets are leaps of faith, India, too, needs an agency to keep them grounded.

In the pre-reform days, the veil of secrecy over the Budget was meant to curb speculation. That changed dramatically over the years, thanks to indirect tax reforms to lower and converge duty rates.

Dipping Into the Cess Pool
The possibility of arbitrage when taxation proposals are made public has disappeared now with the goods and services tax (GST) that has subsumed most indirect levies of the Centre and states.

The exceptions are import duties and cesses. GoI can change import duties in the Budget (although it’s empowered to do so outside the Budget as well). We need orderly reform in import duties, as experience shows that import substitution behind high tariff walls hardly helped India’s manufacturing grow. The best way is for GoI to move towards giving all lines of value addition the same effective rate of protection — a uniform low import duty on raw materials, intermediates and final products. Invariably, new cesses are introduced in the Budget, as Article 270 of the Constitution allows the Centre to levy and retain any cess. However, the proceeds don’t devolve to states, and eat into their revenue. This goes against the spirit of cooperative federalism. The GST Council, too, should put out its deliberations on rate changes in public domain.

How about income and corporation taxes where rate changes are done through the Finance Bill? The Centre is free to separately amend the Income-Tax Act as well with Parliament’s sanction. The Task Force on Direct Taxes has already given its recommendations on the overhaul of India’s tax system. It should be made available for public comment and clear decisions must be taken on its recommendations.

Rates should be part of the incometax law. If GoI wants to make more changes in tax policy in the future, it should come out with a discussion paper that must be widely debated, given that investors want stability and certainty in the tax system.

A break from the convention (read: veil of secrecy) in Budget-making is worth pursuing by a government that has a decisive mandate. It will also make active macro-economic management easier for Sitharaman.

Source : PTI