How Union Budget 2022 is as practical an exercise as it is visionary

Every time there is a Budget, questions are asked about what the Budget has for the common man, or common woman. Those who appear on TV chan...

Every time there is a Budget, questions are asked about what the Budget has for the common man, or common woman. Those who appear on TV channels are not the common person, by no stretch of the imagination. The only person who has ever defined the common person satisfactorily is RK Laxman. The expression “middle class” is equally vague and ambiguous.

Article 112 of the Constitution requires an annual financial statement to be laid before Parliament, an annual statement of Union government’s receipts and expenditure. Union Budget is just that and no more. Especially since 1991, Union Budgets have been, however, perceived to be more. They are statement of Union government’s intent, on policy changes and reforms. In passing, not enough attention is paid to state government budgets, where bulk of expenditure actually takes place. Also in passing, this Budget has enhanced assistance to states for capital investments. Post-1991, policies and Budgets have been about reforms, however that expression is defined. So far as Budgets are concerned, the word reform implies transparency and stability about taxes and expenditure.

Indian Union Budget 2022: Finance Minister Nirmala Sitharaman. ANI

Let’s take taxes. We might have complaints about multiplicity of rates under GST and the fact that not all products and services are part of GST. That said, these are GST Council issues and GST is work in progress. However, the Budget does have procedural improvements. To quote from the fiscal policy statement, “Government is working towards reform in GST administration through further simplifying GST filing and refund processes.”

Historically, our minds have been fixated on whether a particular Budget slashed excise.

As a mindset, that’s over and done with. Taxes are meant to be stable and certain, though as I said, GST is still work in progress and decisions will be taken by GST Council. This leaves direct taxes and again historically, we have looked at Budgets with the prism of whether tax rates have been reduced.

Let’s think of the following. First, we have an artificial distinction between personal income taxation and corporate taxation, with unincorporated enterprise paying personal income tax rates. Second, there are 59 million tax returns. Since direct taxes are superior, from a distributional angle, to indirect taxes, shouldn’t that figure be much more? This of course gets into the question of taxing farmer income, the domain of states. Third, of the 59 million tax returns, only 15 million actually pay taxes. This isn’t always evasion. It is more tax avoidance, availing of legitimate tax exemptions. Direct tax reform therefore involves the elimination of exemptions. An option had already been (both personal and corporate) of choosing the exemption-less route. There were few takers.

Indian Union Budget 2022. Direct tax reform involves elimination of exemptions. Image courtesy Money Control

Fourth, this means the removal of exemptions will lead to an increase in effective tax rates for some segments. Given that economic recovery, documented both in Budget and Economic Survey, is not yet robust, it would probably have been premature to attempt removal right now. It’s still a terminal goal, but not this year.

Fifth, there are multiplier benefits from reducing taxes and multiplier benefits from increasing public expenditure by the same amount. Every economist knows, or should know, this. Hence, in the midst of an uncertain recovery, if I am going to fiscally stimulate an economy, it’s better to do that through public expenditure, not tax reductions. Sixth, every concession granted to a certain segment causes distortions. Seventh, anything given away in the form of a direct tax concession (to the so-called middle class that pays income taxes), means resources that cannot be spent of improving the enabling environment for the relatively poor.

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The point of this harangue is that we shouldn’t have unrealistic expectations about this Budget, or any Budget. “There is nothing as certain as death and taxes.” This is often attributed to Benjamin Franklin or Mark Twain, though the expression was used before them. Tax rates are on their way towards becoming certain and fixed.  Whatever be the expectation of a few, we should applaud the fact that the Budget didn’t touch direct taxation.

What of expenditure? The finance minister said, and everyone agrees, until investments, consumption and exports recover, it is premature to curtain public expenditure and attempt aggressive fiscal consolidation. A 6.4 percent fiscal deficit/GDP ratio, with a 0.5 percent reduction from the revised estimates for 2021-22, is just about right, with the terminal goal of 4.5 percent in 2025-26 not given up.

I should add that a couple of year ago, Nirmala Sitharaman brought greater transparency into deficit numbers, by moving off-budget items into the stated deficit.

This Budget’s estimates (nominal growth of 11.1 percent, disinvestment receipts of Rs 65,000 crore) are caution, conservative, achievable and believable. What should be the form of that public expenditure have? Every economist will argue in favour of capital expenditure, with the caveat that revenue expenditure for the Union government (grants-in-aid) can become capital expenditure for state governments. That’s precisely what this Budget has done. Something like PM Gati Shakti (with seven engines) is about transport connectivity, adding to the productive potential of the economy, generating growth and employment, reducing poverty.

If there is an enabling framework for growth and ease of doing business, why should there not be employment creation, much more than the 6 million in five years, mentioned for 14 sectors that have the production-linked incentive scheme? Like the Budget for 2021-22, this Budget also sets out a vision, this one being for India in 2047. It is a direction this government has followed since May 2014 and the pandemic doesn’t mean there is reason for deviating. Add to that the power of digital technology in eliminating asymmetry of information, helping the disadvantaged and facilitating ease of doing business and ease of living.

If COVID-19 and the resultant dislocation did not hurt India much more, that was because of what the government has done, since May 2014, for the rural sector. This has been catalogued several times, including in Economic Survey. The Budget specifically mentions housing, electricity, cooking gas and access to water. This represents welfare, inclusive development and empowerment. Success in delivering these (now being extended to urban India) render doles and hand-outs superfluous.

The author is the chairman of the Prime Minister’s Economic Council and a well-known Sanskrit scholar. The views expressed are personal.

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