A Budget for Our Times

Context: Union budget of 2020-21 provides an opportunity to resolve the economic crisis in India.

State of Indian Economy

• Economic contraction: by 7.7 % ( a COVID-19 induced loss of Rs 9.61 lakh crore in real terms) for the year and Nominal Gross Development Product (GDP) to contract by 4.2 %. Reasons -
  • Fall in private consumption: by 9.5 %.
  • Contraction of capital formation: by 14.5 %.
  • Contraction of imports and exports.
  • Deep contraction in manufacturing (9.3 %), construction (12.6 %) and trade, hotels (21.4 %).
  • Agricultural issues:
    • Declining credit growth: The Kisan Credit Card (KCC) portfolio of banks is under stress due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product.
    • Exclusion of tenants (atleast three crores) from the formalized credit delivery systems.
• Positive aspects:
  • Government consumption remains in positive territory.
  • Growth of financial sector: Value added by the sector has registered a nominal growth of 1.4 %.
  • Increase in financial savings of households.
  • Low risk of inflation (Perennial Bugbear): Between 2013-14 - 2019-20, average nominal GDP growth was 10.4%, with real GDP growth of 6.8% far outpacing the GDP deflator at 3.6%.
    • Compared to before 2014, growth was 15%, but the average GDP deflator at 7.6% far outpaced average real GDP at 6.8%.

Policy interventions required: to improve the fiscal situation -

• In the Agriculture sector:
  • Relaxing renewal of Kisan Credit Card (KCC) loans: Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention.
  • The payment of interest must be a sufficient condition for renewal. It is important because -
    • 60 % of the total credit to the agriculture and allied activities sector are KCC loans.
    • It will reduce the credit cost for banks on KCCs as Non-Performing Assets (NPAs) can be prevented more easily, and the interest rate on KCC loans can be further reduced.
  • Formalize tenancy: by providing tenancy certificates as available in Andhra Pradesh).
    • Alternatively, the formation of Self Help Groups under Deen Dayal Antodoya Yojana will also formalize tenancy even without formal documentation of tenancy.
• Investments in Health and education:
  • Introduce medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy.
  • Consider exempting all retail and health insurance products from Goods and Services Tax (GST).
• For vulnerable section of the population: offering tax concessions to senior citizens. (fair and equitable in a declining interest regime).
• Controlling inflation: Service inflation must be kept under control through policy interventions like rationalization of fuel taxes that are currently at record highs.
• In Banking Sector:
  • Allow banks and infrastructure financing companies to raise tax-free bonds or tax paid bonds to tap funding from retail investors.
  • Reduce the government’s stake Public Sector Banks (PSBs) to 51 %.
• Redistribution of resources through ‘Jan Bhagidari’: Introducing a voluntary scheme called “Adopt-a-Family”, where a taxpayer can be incentivized to adopt a Below Poverty Line (BPL) family for a year.
• Create a fiscal lubricant: By taking measures like withdrawing all tax appeals, accepting all domestic arbitration decisions against the government and clearing all outstanding dues in time.