Universal Basic Income not feasible in near run, says Madan Sabnavis

While government’s push to infrastructure and tax concessions to households in Budget 2017 may propel the economy to some extent, reduction in corporate tax would have hastened the process even more, noted Madan Sabnavis, Chief Economist at CARE Ratings. He also said that Universal Basic Income is a long process and won’t see the light of the day any time soon. Edited Excerpts:

Finance Minister Arun Jaitley intends to set up mini labs in Krishi Vigyan Kendras. What is it all about?

The government is earnest in its endeavour to make farming more resilient. Mini labs are those which can be used by small farmers in smaller places, which do not have access to the usual Research & Development that is required by farmers. 

We have to see as to how these labs work and how the funding is done. Will there be tax breaks or new schemes will be drawn up by the banking system for funding? My sense is that such labs are already in existence, but one needs to check with the ministry of agriculture as to how this works from the point of view of setting up the same. I’m not sure if the web site www.agricoop.nic.in has any details.

What will this government do with the PDS kerosene? 

Presently this subsidy remains, but I do think that in the course of time we would migrate to a system where one pays the market prices. while this may not work well with the poor, if one follows what successive governments have done with all fuel products, it appears that they would like to withdraw subsidy and make it more targeted. Hence, there would be some kind of screening of households to begin with before we could go the same way as LPG. Besides, if we are talking of universal basic income, at some point we will do away with this scheme all together.

When can we expect Universal Basic Income to become a reality?

It will be a long process. First, we need to take the states along too. Second, to do so we need to have the money which cannot be addressed even today if we want to provide the amount to only those below the poverty line. Third, there is the system of identification of the deserving, which is always the challenge. Fourth, while we can say that we remove all subsidies which includes education/health/ etc, I think it is the job of the government to create social infrastructure and not leave it to the people who are given money to decide the same. Hence, UBI may not be feasible in the near run. besides, giving it without any link to employment or condition (like education in brazil) runs the risk of moral hazard.

Will Goods and Services Tax (GST) have any impact on the country's Gross Domestic Product (GDP)?

There are two issues here. First, when GST comes in there will be more enterprises which hitherto were out of the tax net, get revealed in order to take advantage of the tax credit. This will automatically lead to an increase in GDP in the first round. Second, ours is not an economy where we have not been able to supply goods because of high tax rates. complex tax system creates a high cost economy and makes doing business irksome but does not limit production. Therefore, I would tend to think actual production may not go up unless prices come down. But we are all the time talking of a revenue and inflation neutral rate. Besides, even when tax rates come down, rarely does it get reflected in the final prices of goods in our country. Therefore, I would say that in first year it could go up due to better accounting, but subsequently the benefit would be insignificant.

Did you see any significant change in the real widespread distribution of GDP?

No, we have not seen any significant change in GDP composition. we remain a service oriented economy and the main thrust in growth is coming from the three sectors: trade, transport, banking & finance, real estate and government sector etc. We need manufacturing to grow by 9-10% per annum on a continuous basis to bring about this transformation.

What is the impact of Budget on IT industry?

With the entire focus now being on digitisation, the related sectors in hardware and software should receive this one-time booster, but the main problem for the IT sector is related to the developments in the US on the visa issue. Government should take it up at the diplomatic level.

The Budget 2017 appears to be a guarded one, perhaps because it comes on the backdrop of demonetisation. What, according to you, are the measures in Budget that will boost the economy?

Two measures will help to grow the economy though I would be guarded on the word ‘boost’ as the amounts involved may not be very high. For example, infra push in the budget is an increment of Rs 30,000 crore over revised estimate of FY17. This is a good amount to ensure growth takes place but we need private investment to take off for high growth. similarly, tax concessions to households will release some funds but the amount may not be that high to propel the economy forward at a fast pace; a boost to investment through corporate tax cut could have hastened the process.

What is the major source of revenues for the government?

There are essentially five sources of taxes for the union government which matters. First is corporation tax which is the largest and accounts for around 20%. This is followed by income tax with 15% and excise, service and customs. For customs and excise, the base has to increase on imports and industrial production. As long as they are low, which has been the case in the recent past, collections tend to get affected.

How will the tax reductions impact the economy?

Tax reduction for individuals will give more money to households which can be spent or saved. The hope here is that the money will be spent given that the demonetisation impact on consumerism was quite sharp, but the amount involved may not be too high to cause a major shift in consumption. For the SMEs, a lower tax rate will make them more profitable, be better placed to service loans and make them go in for higher investment.

Since Jaitley did not increase the service tax, will it be difficult for common man to move from current rates to GST rates?

From the point of view of the common man, when GST comes in, a higher duty rate most probably has to be paid. It is expected to be 18% unless there is a bifurcation made between essential and non-essential, but for the supplier of service, one has to have registration in all centres where services are provided, which will be more complex.

Do you think the government will be able to meet its fiscal deficit target this year, given that Apr-Dec deficit has reached 94% of stipulated target?

Normally we have seen that when the fiscal deficit target is being breached, the government cuts back on expenditure to ensure the target is maintained. Otherwise, it can draw down on cash balances, which has been done this time to ensure that the fiscal deficit mark is not overshot. hence, I do not see any challenge here. the problem for the government is that when it draws up the budget, there are some growth assumptions which may not be met. This creates a revenue shortfall which has to be met by higher borrowings or expenditure cuts. The government has preferred the latter of late.

I think shifting index base from April, 1984 to April, 2001 will have a negative impact on the long term capital gain as the indexed cost of acquisition of properties bought before April, 2001 won't be proper, and there would be heavy taxation. What is your say on this?

I agree that by bringing the base to 2001, the government gains as the older base gave advantage to the seller. Prices have moved up between 1981 and 2001 and that is a loss when indexation takes place.

Hasn't Arun Jaitley leaned too heavily on the so-called success of the demonetisation drive to present his budget?

FM has not really taken into account gains from Income Declaration Scheme (IDS) in his budget numbers and hence I think that advantage is not embedded in this budget.