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    Budget 2021: How Nirmala Sitharaman can find the money to target growth

    Synopsis

    The focus must be to boost investment as a share of GDP, languishing below 27%.

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    Nirmala Sitharaman should target growth, more than anything else, in her forthcoming Budget, tailored to lift the economy out of the pandemic-induced slump. Fiscal consolidation should be a secondary goal. Globally, the collective support given by governments to their national economies adds up to $12 trillion, almost 13% of global GDP, half of it as liquidity support, and the rest as additional fiscal expenditure. No rating agency is going to find fault with India for fiscal wantonness, unless it sees its ideal of fiscal rectitude on, say, exoplanet Proxima Centauri b, our nearest earth-like neighbour.

    The focus must be on boosting investment as a share of GDP, languishing below 27%, six percentage or so points below what had routinely been achieved in India’s high-growth years. We have a National Infrastructure Pipeline of projects, some of them shovel ready. They must get going with funding and risk mitigation by the government. Once past the risky stages such as environmental clearance and land acquisition, the government will be able to find foreign capital to take up the projects.

    With central banks in the US, Europe and Japan having slashed their policy rates to zero or negative, to support their economies, pools of savings from these economies are on a global hunt for decent returns. It should not be all that difficult to attract a few hundred billion dollars to India’s infrastructure that would boost economic growth, improve efficiency and raise productivity. Government guarantees translate into contingent liabilities, not direct additions to the fiscal deficit.

    The government has made commitments to make large investments in farmgate infrastructure and in fisheries. These must be fulfilled.

    Banks have to be recapitalised and a corporate bond market made functional. Without these, infrastructure projects will not be able to get going. Scrapping the securities transaction tax is one service the government can do, to let mitigation of assorted risks on debt be hedged efficiently via appropriate derivatives traded on the exchange. Several steps, such as allowing netting of margins, have already been undertaken.

    The government should also make its support for the real estate sector work on the ground. Fund some special vehicles to take over projects that have acquired land and progressed to some extent but are less than 70% complete, and complete them. Build in energy-efficient designs for townships, residential clusters and individual buildings, and boost the green economy in the process, as well.

    How will the government find the money? Should it levy a special Solidarity Tax on the rich, as a temporary measure, of course? The idea is popular in some quarters. It is a bad idea. Taxes, once introduced, tend to acquire a life of their own and refuse to go quietly into the night, even if a finance minister sets a sunset deadline. The undead, as anyone familiar with old-fashioned vampires or the later generation of virus-induced zombies can vouch, are not good for your health.

    The tax that targets the rich should be on the estate left behind at the time of demise. There is much to commend the estate duty. It does not disincentivise wealth creation during an individual’s lifetime. It reduces the extent of transmission of inequality across generations. Several American states levy estate duty in excess of 50%. A collateral benefit has been a profusion of museums and grants to charities, think tanks and do-gooding trusts by billionaires, who like the idea of their names living on while denying the Internal Revenue Service the pleasure of scalping much of the fortunes they have built.

    India collects only some 17% of GDP as tax, because of the inability of the tax authorities to use advanced data analytics to identify sources of untaxed income. The December collection figures for the Goods and Services Tax were impressive, partly because the government has finally started following up on the audit trails automatically generated by GST and cracked down on fraudulent input tax credit claims.

    If this is followed through systematically, tax collections can go up, and not just of indirect taxes. GST is a tax on the value added by a company. And value added is the sum of gross profits and the outlay on wages and salaries. If GST is collected systematically, then the door opens to a fairer estimate of the corporate and personal incomes generated in the course of any GST paying enterprise’s business.

    The government must invest more on healthcare infrastructure, particularly on preventive healthcare. Clean water, clean air, nutrition and promotion of a healthy lifestyle are probably more important than curative healthcare.

    While stepping up public outlays on healthcare is important, it is even more important to create a framework of healthcare in which care providers, health maintenance organisations and insurers compete, under watchful regulation to ensure quality and ethical conduct.

    The government’s focus must be on better implementation of its taxes and on attracting foreign funds into well-thought-out infrastructure investment projects.
    ( Originally published on Jan 15, 2021 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    13 Comments on this Story

    Anba50 days ago
    Worthless write up.
    B G Baliga50 days ago
    Bank deposits are already falling as the depositors look to other ways to invest money.
    Suresh Kamath50 days ago
    Budget Wishes are similar to New Year Resolutions and yet NONE stick to them for a while and go their Own ways sooner and yet expect ALL others to KEEP the RESOLUTION. Budget is ASSESSED by the FM and the efficient Team Members who have to Balance the NEEDS and Wishes of each ONE and yet MUST never let go of the REVENUES but set those higher to meet the DEVELOPMENT of the STATES and complete PROJECTS for the PEOPLE across the Country. Hope of the FM reducing Taxes for ALL is an UTOPIAN DAY DREAM and MUST be avoided as the MOST Advanced NATIONS do have decent TAXES and being PAID diligently by almost all Members of the NATION unlike in the Country and surely PEOPLE would have take a View on this aspect too.Hope for the BEST and WAIT for the 1 st of February the D Day of BUDGET Presentation and this Year would be UNIQUE with NO Paper Print and thereby HEAVY SAVINGS on this aspect and TRULY a HUGE GAIN to start with the BUDGET itself
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