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.