Budget 2021: Go for bond, not cess to fund Covid expenditure, say experts

As the Budget may try new options to finance the Centre’s Covid expenses and additional spend on reviving the economy, most experts favour bonds to fund extra outlays (compared to cess).

“In a situation where the demand-side continues to be weak, any additional form of taxation is a bad idea,” said former chief statistician Pronab Sen.

He said raising it through bonds which have attractive conditions is a better idea because that would be a voluntary shift by the people.

He also reminded policymakers that the primary cost of immunisation is going to be borne by state governments.

In that perspective if the Centre imposes cess, distribution of cess to states is an open issue. “Rather, states should be asked to raise money through a Covid cess. With Centre’s permission, states can impose cess,” he clarified.

Former Reserve Bank of India (RBI) governor Duvvuri Subbarao had earlier suggested that issuing of Covid bonds directly in the market as one of the options to raise debt.

“That has several merits. Appropriately designed, it will provide an attractive option to savers who are being short-changed by low interest rates in the face of above-range inflation,” Subbarao had said, adding that this tactic was necessary, albeit insufficient.

When asked which is preferable — Covid bonds or Covid cess — he succinctly replied they are not mutually exclusive.

Neeru Ahuja, partner at Deloitte, also said this may not be the best time to increase taxes. “In order to revive the economy, we need to see growth in demand. This also means placing more disposable income in the hands of the people,” said Ahuja.

Partha Chatterjee, head of international partnerships and head of economics at Shiv Nadar University, said the expenditure on vaccine, by itself, was not going to be substantial.

Assuming the government gives free vaccine to 70 per cent of the 1.3 billion people, if a vaccine costs Rs 200, the total cost will be Rs 14,000 crore (the landed cost will be higher for a vaccine, but the government is very unlikely to give free vaccine to so many),” he said.

“This is roughly the same as the allocation to the Smart City and Atal Mission for Rejuvenation and Urban Transformation in 2020 Budget (and half of the Pradhan Mantri Awas Yojana allocation) and about 0.6 per cent of total government expenditure proposed in the last Budget,” elaborated Chatterjee.

However, given the lower revenue collection and higher expenditure to mitigate recession, it means the government will have to think about options of financing deficit.

“Given the whole reason for this is that the Indian economy is in recession, it will be a bad idea to increase cess. This may reduce consumption further and depress demand,” said Chatterjee.

He said it was possible to issue new government bonds without crowding out, given the economy (actually, all economies across the globe) was flush with liquidity and in fact, the Reserve Bank of India (RBI) was buying loads of US government bonds. “In a way, the RBI is financing US deficit. Note, one may claim this will weaken the rupee — which necessarily may not be a bad thing,” he said.

Abhishek Rastogi, partner at Khaitan & Co., said the imposition of cess would be subject to judicial review and hence, the bonds would be a better approach to raise additional funds, but will come at a cost to the government exchequer.

“In case the bonds address liquidity issues and have a minimum possible lock-in-period, it can attract a lot of investors,” he opined.

Arun Singh, global chief economist at Dun & Bradstreet India, said given that the tax and non-tax revenue realisation of the government would remain low and expenditure would remain high in 2021-22, the government would have to resort to both conventional and unconventional ways of raising resources to finance its fiscal deficit.  

The cost of vaccination would impose a higher fiscal burden this year. The need for additional stimulus measures, including additional spending on Mahatma Gandhi Employment Guarantee Act to boost rural employment or supporting the micro, small and medium enterprises segment till the economy recovers, would put pressure on government finances, he said.

He suggested that the Centre had the option of printing money or borrowing overseas to fund its expenditure and pursue disinvestment aggressively, and monetise its assets.

“Given that the government should not spend anything less than 5.8-6 per cent of gross domestic product, the government could also look at placing a civic cess and introduce Covid bonds,” he said.

The civic cess should be less than 1 per cent if the government wants to impose it on all taxpayers and can be greater than if imposed only on high-income individuals.

However, the civic cess should be withdrawn after a period of one year, he said.  

The government could issue Covid bonds. However, the amount raised through these bonds would not be high since domestic borrowing will exert pressure on yields.

“It is pertinent that the government increases its external borrowing. With ample liquidity in the global market and near-zero interest rates, the government can look at increasing external borrowing during this current fiscal,” said Singh.

However, the jury is still out on whether bonds are a superior idea to cess.

Raghavan Ramabadran, executive partner at Lakshmikumaran & Sridharan, said three potential sources that the government may consider are a new Covid cess on certain luxury goods under goods and services tax, new cess or surcharge on income-tax on affluent taxpayers, and/or issue special Covid bonds.