<b>T N Ninan: </b>A Big-Bang Budget

The meat of the proposals on the spending side are likely to have an overtly populist touch

The new year brings with it the Budget season, and the setting for the government’s next big move. Given the backdrop of demonetisation and a slowdown in the non-agricultural economy, the government should be expected to come out with a response that is a more-than-usual mixture of politics and economics. It is now widely anticipated that the government will stretch out the income tax slabs, and also raise the limit for tax-free income. Given the government’s increasingly populist stance, and the prime minister’s comments (later played down by the finance minister), one should not rule out some tweaking of the capital gains tax or other measures that seek to get more from the wealthier sections. As for the corporate tax, the finance minister has already promised to reduce the rate and eliminate some exemptions. He has so far moved slowly, and this Budget may see a more purposeful step. On indirect tax rates, Mr Jaitley would be well advised to use the occasion to move rates closer to where they will be in the integrated goods and services tax, whenever it materialises. Whether all this is done in the framework of a new fiscal plan that shifts the focus from the deficit to public debt (both judged in relation to GDP) is one of the unknowns. It should be clear to all, though, that any switch which creates room for a more lax fiscal stance will be viewed negatively by international investors.

On the expenditure side, substantial changes are inevitable. For one thing, the railways’ numbers are to be incorporated into the Budget. Hopefully this can be seen as a clear sub-set, making the rest of the Budget comparable to past years. A recast is also due on the other numbers, since the out-dated and always problematic distinction between Plan and non-Plan is finally being scrapped. Whether a more ambitious scheme to re-define what is capital expenditure, and what falls into the revenue account, remains to be seen. Perhaps investment in social infrastructure (health and education, mainly) can be clubbed into a new category and highlighted.

As for the thrust of spending, the Modi government has used its first 30 months to launch some three dozen or more programmes and projects. Some of them are modifications of existing ones, others have been expanded, and some are new. As is inevitable, their implementation or roll-out has been patchy. With parliamentary electioneering just over two years away, it is only to be expected that the government’s attention will turn to those schemes which can be shown to be completed by 2019. These include last-mile connectivity issues with regard to rural roads, electricity and digital infrastructure, the digital payments thrust, two dedicated freight corridors, and other such.

That aside, the betting has to be that the meat of the proposals on the spending side will have an overtly populist touch. There is some speculation on the introduction of a universal basic income scheme, ie a direct benefit programme that goes to all, not just the poor — thereby doing away with the problem of identifying who is poor. This has been advocated most recently by Vijay Joshi in his recent book, India’s Long Road: The Search for Prosperity. As with the gas subsidy, the prime minister may ask the better-off to give up their claims to the basic income support. However, the supporting infrastructure is not fully ready. Also, such a scheme becomes fiscally affordable only with a wholesale scrapping of subsidies, which the government may be unwilling to risk in the midst of important state elections.  What may be likely therefore is a half-way step, presented within the framework of a later move to a universal programme. So don’t be surprised if, come Budget day, the main headlines have to do with the political message of the spending programme, not the re-jigging of tax rates.