Who Is Better Placed To Finance The Higher Fiscal Spending?

Livemint     1st June 2021     Save    
QEP Pocket Notes

Context: India Inc and stock market investors are in a good position to shoulder the government’s responsibility of reviving India’s economic growth, upgrading health sector capabilities and ensuring that young Indians do not lose out on education and skills.

Need for sharing responsibility

  • Impact of the pandemic:
    • Lost education: Inferences from IMF’s Fiscal Monitor -- school year lost by children, with biased impact on children of low-income families whose parents are not educated themselves.
    • Worsening income inequalities: China and India lead rankings in terms of inequalities over the past three decades.
  • India’s low ranking on paying taxes – World Bank’s Ease of Doing Business rankings: India’s effective tax rate pegged at 49% in the 2020 report.
  • Liberal tax policies: Top corporate income tax reduced to 22% in 2019 leading to effective corporate income tax collections of 26.9%, 29.5% and 27.8% in three years from 2016-17 to 2018-19.
    • But this is likely to weaken in 2020 as India collected only around Rs 5.6 trillion in corporate income tax during the year.
    • And as the profits of companies in 2020 is bound to shrink, the anticipated non-financial capital formation due to reduced taxes unlikely to manifest.
  • Continuing stronghold of share market: In 2020-21, the market capitalization of companies listed on National Stock Exchange went up by almost $1.3 trillion to a shade under $2.8 trillion (85% return), according to the World Federation of Exchanges.
  • Limited scope for further taxing rich: Such options (as taken in Indonesia) have limited feasibility in India as the top marginal tax rate on individual income is already quite high. 

Way forward: Policy options to share responsibility

  • One-time additional tax: To be collected in 2021-22 on the profits of 2020-21 as an alternative to revisiting the country’s (reduced) top marginal corporate tax rate.
  • Tax financial profits from share market: As even a 1% tax imposed on share market financial profits, it would fetch the government Rs 90,000 crore.
  • Raising short-term transaction tax on stock market transactions: There is a risk that these measures might temporarily lead to a sell-off in Indian stocks but, that could be healthy over long-term both for market and investors, given that Indian stocks are valued too richly relative to their earnings prospects.
QEP Pocket Notes