What would Make this a Budget Like no other India has Ever had

Livemint     21st January 2021     Save    

Context: In order to have sustainable growth and adequate employment generation in post-covid times, the government should ensure a macroeconomic environment conducive to growth and reforms in critical areas.

Challenges to Indian economy

  • Rising fiscal deficit: The fiscal deficit (states plus central government) is expected to be more than 13%.
    • Due COVID-19 effect: falling private consumption and weak investment combined with revenue collapse for the government.
    • Expenditure commitments by the government: which include -
      • A credible vaccination programme,
      • Income support to the poorest (hot hard by a K-shaped recovery) (e.g. via MGNREGA),
      • Recapitalize banks to deal with non-performing assets,
      • Rise in defence expenditure to manage geopolitical situations.
  • Issues with fiscal consolidation:
    • Low tax ratio: further negatively affecting fiscal consolidation.
    • Issues with Goods and Services Tax (GST): Its implementation has reduced its revenue-raising power. (Today’s top rate of 28% is too high and applies to many intermediate goods.)

Way forward: Reforms for a higher growth

  • Budget reforms: Include off-budget borrowings under fiscal deficit which will enhance the credibility of the government.
  • Deep tax reforms: will achieve fiscal consolidation in the long term as both revenues and Gross Domestic Product (GDP) will grow faster.
    • Setting up a group of experts like the Chelliah Committee (1991)
    • Fixing the Goods and Services Tax (GST): by including the exempted goods and reducing the number of tax brackets.
  • Strengthening the banking sector: by following six-fold path -
    1. Strengthening the RBI’s powers over public sector banks (PSBs) – for proactive supervision.
    2. Avoid delays in the insolvency process under the Insolvency and Bankruptcy Code (IBC).
    3. Set up a government-owned “bad bank”: would take up the stressed assets of PSBs and concentrate on recovery.
    4. Privatize a few PSBs by bringing in strategic partners from the private sector.
    5. Implement the Nayak Committee recommendations: Put government equity holdings in PSBs into a separate professionally-managed holding company and let each bank be board-managed.
    6. Establish a new development finance bank: to provide long-term loans for core infrastructure development with the government having minority ownership and other investors, including sovereign wealth funds contributing capital and having a say in management.
  • Turn railways as an independent public sector corporation: as china did ten years ago; It would give the railways more flexibility to raise market funds and engage in public, private partnerships.
  • Public vaccination program for COVID-19: should be made free.
    • Private hospitals should be allowed to participate: this will give a choice to people and also reduce the financial burden of the government.