Government revenues are likely to be under pressure in this budget due to a mix of lower disinvestment revenues, lower direct tax revenues and higher allocation towards OROP and the implementation of the Seventh Central Pay Commission (SCPC). As far as the broad expectations from the Union Budget 2016 in terms of revenues are concerned, it needs to be remembered that higher revenues for the government automatically means higher pressure on taxpayers.
Need clarity on the disinvestment front…
The disinvestment target announced in the last budget is likely to be grossly underachieved. Against the target of Rs.69,500 crore, the government may end the year with less than Rs.20,000 crore in disinvestment. This shortfall of Rs.50,000 crore will have to be made through other sources. Broadly there are 3 key expectations from the disinvestment front…
- Disinvestment estimates must be more conservative and realistic in nature. Last year the government had estimated Rs.41,000 crore through minority stake sale and Rs.28,500 crore through strategic stake sale. A strategic sale calls for a lot of ground work and preparation and not surprisingly it did not generate any revenues this year. The government needs to identify 5 companies as a test case which will be sold off through the strategic sale route during the year. Once the template is frozen, then subsequent strategic sales will be much simpler.
- The government needs to do a sector wise break up of where selling minority stake at a good valuation will be feasible. For example, oil extraction companies will not be easy to sell but OMC will be in much greater demand and will also give better valuations. Similarly, if the current budget talks about a reform package for PSU banks, then bank stake must be sold off in small tranches so that full value can be realized in each of these tranches.
- The government also needs to talk about privatization than about mere divestment. What PSU companies need are more transparent management, operational freedom and market competitiveness. Change in ownership alone is not sufficient.
Broadening the tax base…
The government has been talking about broadening the tax base for a long time. This budget is the time to walk the talk. India has the lowest tax/GDP ratio among emerging markets. In fact, India’s tax/GDP ratio is also lower than less developed countries like Nepal. The answer is to bring more people into the taxpaying mainstream. India’s tax / GDP ratio languishes at around 6-7% and needs to be taken up to at least 12/13% in the next 3 years. Some of the broad suggestions could be as under:
- With over 900 million Aadhar Cards issued and the massive financial inclusion drive, tracking flows should be much simpler now. The government should expand the TDS route to tap more flows of tax and more people into the tax ring.
- Tax evasion is a major issue in India. Despite the best efforts of the government people continue to evade taxes with impunity and that is one of the key reasons for the low tax/GDP ratio. People want the government to use technology and transaction intelligence to narrow down on the likely evaders
- Getting black money back into India is a major challenge. During the election campaign the government had promised to bring back the black money stashed abroad within 100 days. While that was ambitious to begin with, not much has happened in the first 21 months of the current government. The special window scheme was also not effective. People are expecting that a good portion of the black money will be brought back into India so that the legitimate taxpayers are not put to hardship due to such evasion.
Using excise duty on petrol and diesel…
It is understandable that at a time when revenues are falling short, higher excise imposed on petrol and diesel is being used to compensate for this shortfall. However, due to this higher excise duty people are not getting the real benefit of falling crude oil prices. The expectation is that this budget will work to address slippages in disinvestment and direct taxes so that the benefits of falling crude oil prices can be actually passed on to people rather than the government soaking away a part of it through higher excise duties.
A clear growth path in the year ahead…
A key expectation of the budget 2016 is a clear growth path in the year ahead. It needs to be noted that at 7.4% GDP growth, India remains the fastest growing large economy in the world. However, to sustain this growth and build on it two things are essential. Firstly, the interest rates need to be brought down and banking sector needs to be reformed to enable easy flow of funds. Growth can be achieved only if low-cost funds are available and accessible for Indian industry.
Quality of infrastructure is another major challenge and this budget is expected to address this issue. India requires nearly $200 billion of infrastructure investment each year to bring our roads, ports and railways to global standards. This budgets needs to come out with a package of tax incentives, innovative funding sources and incentives for private sector participation. It is estimated that quality infrastructure alone can add nearly 2% to India’s annual GDP growth. This budget may be the ripe time to kick-start the process in right earnest.
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