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The Budget generates more TRP than economic momentum, at least that is what I have observed over the years. After the 1991 and 1992 Budgets, incrementally they have not been such major policy documents. Policy is an all year round affair now, so it is not concentrated on a single day or a single morning of Budget.
Nonetheless, the market focuses a lot on it. At least it seems so. But when you look at stock market performance of last 25 years, the impact of the Budget has been waning both in terms of the volatility it generates as well as the lasting impact it has on share prices. In that backdrop, there are clearly expectations that the government will use this platform on Saturday to continue with the recent momentum that we have seen on the policy front. It started in, say, August last year, and I think there is some expectation around it.
So what can happen? First of all, the most important thing to watch would be what is the fiscal deficit target. Even more important than that will be how credible the numbers are. Over the past several years, successive governments have intended to consolidate the fisc, and clearly we have struggled on this front. Targets have been missed and we have delayed the consolidation. Now we are looking at over 3 per cent (deficit) in the next couple of years. There is clearly going to be some slippage because of the tax cuts, because of the overall slowdown in the economy. So we get some consolidation, but I do not expect a whole lot.
The second thing to watch would be what the government does with its expenditure. I clearly see the need to boost consumption or boost economic activity. So I am hoping that there is an increase in transfers to farmers. The government has a very good scheme in place under which it is transferring cash to farmers. It was launched in December of 2018 or rather in February 2019 with retrospective effect from December 2018. I hope that scheme is enhanced, because clearly there is pain in the rural sector and this is a direct way of addressing it.
The government has already talked about boosting infrastructure spending, so we will wait for some more details in the Budget. Then the other thing is, what does it do with the taxes. There is clearly room to rationalise taxes, and I am hoping attention is paid to capital markets, whether it is dividend distribution tax or long-term capital gains tax. There is scope for us to rationalise these and this may be a good year to do that with direct implications on share prices and, of course, the economy, because share prices reflexively act on the economy as well as the other way around. It is not just the economy that influences share prices, but even share prices influence the economy.
Another area we should be looking at is how the government wants to monetise its balance sheet, what we call privatisation. Because resources are clearly constrained in this economic backdrop, and there is need for greater monetisation of the balance sheet. They should really get aggressive about this. The 2001-2003 period can be a good template to use, when the erstwhile NDA government under the leadership of Vajpayee and Arun Shourie had launched a massive privatisation programme. That is the type of privatisation programme I am hoping to see in the next 12 to 24 months. That will give the government the much-needed resources to heal the economy and undertake more tax reforms.
Now, the country is getting a detox because of the reforms that happened outside Budget. Right now the economy needs a caffeine shot, which means more money should reach consumers. What could be that caffeine shot in this Budget?
It is not about caffeine shots, because they fade away quickly. What you need is greater focus on structural reforms. There is a lot of low-hanging fruits on this front, and Budget is the platform for doing this. You can make the announcements there, but the action has to happen on a daily basis. Whether it is liberalising the investment environment, making investments more viable, actually getting manufacturing companies to set up capacities – these are things that will actually revive the economy on a more sustainable basis.
There is clearly room to rationalise taxes, and I am hoping attention is paid to capital markets, whether it is dividend distribution tax or long-term capital gains tax.-Ridham Desai
Yes, you can throw some money around and hope that people will spend it, but that is not going to create a sustainable recovery in the economy. What we can also wish for, and that is the Morgan Stanley view, that there will be a modest improvement in global growth. Of course, there is this virus risk out there, and I hope that it fades away. We have to keep great vigilance about it, because it has the potential to spoil the nascent economic recovery and people tend to underestimate the role of exports. We have been talking about this for a while. India’s share in global exports has been stagnating for last six to seven years. On a physical plus services number, it is about 2%. That needs to go up, because if you want greater economic prosperity, you need to trade with richer people. If poor people are trading among themselves, that is if we remain a domestic economy, we are not going to actually create prosperity. It is very imperative that we go out and trade with the rest of world. You need trade deals out there. You need trade deals done with the US, with the euro zone.
These are things, which are outside the Budget but which are far more sustainable in creating economic growth and prosperity than single cash shots thrown at consumers. Also, do not forget come August there is a massive refund coming in the way of the middle class, which was announced again in the February 2019 Budget. If I remember correctly, about Rs 20,000 crore will come in the form of refunds to middle class taxpayers. So, there is already that pending stimulus coming in August.
So, there is need to do more structural reforms, farmers need to get greater attention as I mentioned at the outset. Food prices have been very well contained by this government over the last five or six years. One of the fallouts of that is that the terms of trade in this country are transferring the wrong way; it is going from the farmer to the middle class or the upper classes in terms of income, whereas it should actually be going the other way — richer people should be transfer trade to farmers. How do you reverse that? You cannot lift food prices, because then it creates generalised inflation and everybody suffers. The best way to do it is through these cash transfers. It is possible because the infrastructure is in place due to Aadhaar and DBT. I would only focus on that segment for throwing cash, but not on general consumption. You rather work on structural reforms and save your bullets for those rather than spend your money away. Infrastructure is a much better area to spend on and create jobs than throwing cash into consumer pockets.
When the tax on buyback was introduced, and when surcharge on the super-rich came, the sense one got was that this government is anti-rich, it is against wealth creators. Do you think more than anything else, it is the attitude and the whole tonality of the Budget which will matter? Because the last thing you want is a Budget to project that they want to tax the wealth creators more?
I think the buyback tax was only to close the arbitrage which existed because of dividend distribution tax. If you take a relook at the dividend distribution tax, and if that is removed and dividend is taxed in the hands of the recipient, it does not necessarily lower the tax burden. If anything, the tax burden goes up depending on the details. Then the buyback tax would lose its meaning. Therefore, it should also get removed, logically speaking.
I think the buyback tax should not be viewed as an anti-rich measure. Years ago, the government had introduced DDT on debt funds, which was not done initially when the dividend distribution tax was brought in the first time. It was done later on, because people in the government realised that there was an arbitrage between bank fixed deposits and debt funds, which began to hurt bank fixed deposits.
The Finance Minister said last year that the surcharge on the super-rich was temporary move because of the shortfall in resources, and not a permanent one. If that remains a temporary move, and if it is reconsidered in whatever timeframe that they are suggesting, then it will get reversed. I buy your point that you want to actually be subservient or paying attention to the entrepreneur, because he is the one taking risk and creating jobs. He is the most important person to bring in economic prosperity and that he gets due attention. We have heard this from the Prime Minister as well, and we have seen the actions of the past few months. I think the entrepreneur is back in consideration. I think one can expect that spirit in the Budget.
The assumption is tax collections have gone haywire. In your report, you have mentioned that there is a 56% drop in collections. Given that and the economic backdrop of slow recovery, what do you think should be a reasonable tax or revenue assumption for FY21?
This year the hurt was a obviously because of the very big change in corporate tax rates. GST revenues are actually picking up and finally stabilizing. It’s looking like they are now going to be over the six figure mark on a sustainable basis. That is a good indicator.
Stepping back for a moment, if you look at high frequency data, a lot them seem to have seen the bottom in the October-December timeframe, and all are turning up, including industrial production, which hit an all-time low in October. I am not saying the economy is firing in all cylinders. But it does look like the economy is bottoming out, and to that extent, we can hope that nominal growth next year will be a whole lot better than this year. So maybe, this year nominal growth is in the eight handle, and next year in the handle of nine or approaching 10. That should be the basis for computing taxes, with no changes in rates. I do not think there will be any dramatic rate change after what has already happened. I think 10% is a reasonable assumption for nominal growth, and therefore, for tax collections. Again, this is on the presumption that there are no changes in rates. If rates are changed, then accordingly that number would change.
Over the years, more and more services have reached that tax bracket. Some 10 years ago, going to a gym or going to a beauty parlour was not taxed, but today it is taxed. Given that the economy is changing, we are becoming cashless, we are moving towards digital, do you think more and more services, especially one or two new services from the digital economy could be included as tax bracket?
That would not be a subject of debate on Saturday, because all indirect taxes are now the prerogative of the GST Council. I do not expect anything in that regard on Saturday. The GST Council will look at all these things and over time there will not be a single service or good which will be outside the purview of taxation. We are heading into next three to five years where the number of tax slabs will reduce to maybe two or three, and the tax burden in terms of rate would actually decline. That will be the consequence of greater compliance. We will achieve over the next three or four years. That will be the overall trend: more and more services will be included and more goods will be included, but the overall tax rate will go down.
The difference between personal tax and corporate tax is very large now. I do not want to use the word arbitrage here, because it is not an arbitrage, but there is a scope for tax leakage. Since they have already moved on corporate tax, do you think changes on personal taxes are coming for sure?
It is an arbitrage, because a lot of firms in India are organised on a proprietary or partnership basis, and their tax rate is now a lot higher than the corporate tax rate. Hitherto a lot of small firms, I am talking about really small firms like the thela wala sitting outside our building, would not set up corporate entities. If he is paying taxes, he would prefer to keep it as a proprietary or a partnership firm, because there is a pretty long list of compliance you need to fulfil as a corporate entity. So the minute you do that, you are getting into higher costs. But the arbitrage now is significant for a lot of people to reconsider the structure under which they want to operate their businesses. I expect a lot of small and micro enterprises, which were not operating as corporate entities, to look to actually become corporate entities.
To me, this is actually a very big formalisation move. In fact, this is bigger than what demonetisation or GST achieved. The tax arbitrage between a regular firm, a non-corporate firm versus a corporate firm is pretty large enough for people to think and become corporate entities. I am sticking my neck out, but over the next 12 to 18 months, it is quite possible that corporate tax revenues would surprise on the upside, because compliance levels will go up, because people become more formalised in their structures due to the tax arbitrage. I do not know how long that sustains, but it is unlikely that personal tax rates would drop to the corporate level in the foreseeable future. So this arbitrage will continue, especially at the highest end of the tax bracket.
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