Trust us, our budget could bring a smile even to Union Finance Minister Nirmala Sitharaman’s lips. (File Photo | Parveen Negi, EPS)
The charming thing about budget is its single figure — the annual income and expenditure number.
Arriving at the estimate, however, isn’t as simple, and every year, governments have to squeeze in the requests of several stakeholders, and perhaps even give in to some of their not-so-desirable demands.
But how does India’s budget look like, when it’s free from the pulls and pushes of trade, industry and investor lobbies?
The New Indian Express brings you a first-hand account.
The second edition of the Shadow Budget 2025 takes a long-term perspective to both resource allocation and resource mobilisation, but with an achingly specific details on how to rebuild growth. The state of the Indian economy isn’t sound, with pockets of stress seen everywhere.
Household stress is real and here. They are not earning enough as real incomes have been stagnant for years, and so the growth in saving and spending is even lesser every year. MSMEs are yet to come out of the triple-shocks of demonetisation, GST rollout and Covid pandemic fallouts. Large companies are back on their feet but are in no mood to invest citing poor domestic demand. Lastly, our goods and services exports too need an energetic uplift.
In other words, now is the time for the government to be bold. As Oscar Wilde said, anyone who lives within their means suffers from a lack of imagination and this can’t be truer in the context of Indian economy. All talk about fiscal consolidation can wait, In fact, it’s the worst choice to make at this point in time. In any case, India isn’t going with a cap in hand to foreign lenders and so there’s no need to finger our worry beads about a potential ratings downgrade.
What sets the Shadow Budget apart is that it not only stays away from immediate fiscal consolidation, but restructures capital gains taxation, doesn’t increase contribution from GST, links corporation tax rate to employment, productivity and value-creation through innovation, and raises the revenue share of states to pre-pandemic levels. The latter is crucial as states play a critical role to cater to education, health, housing and sanitation programmes.
In all, it proposes an additional resource mobilisation of Rs 60,000 crore for states and Rs 50,000 crore for the Centre, taking the gross tax revenue to 12% and its share to 8.1% from the interim budget level of 11.69% and 7.94%, respectively. The revenue buoyancy is expected to continue to be more than one, i.e., tax revenue is set to grow faster than GDP at current prices. The proposal to link corporation tax to specific goals is expected to result in higher realisation, going to 3.5% of GDP from 3.18% in the interim budget.
At the same time, the budget seeks to lower tax rates for low- and middle-income households and rationalisation of capital gains taxation is expected to keep the level of tax on personal income at about the same level as seen in interim budget, which is 3.5% of GDP.
Resource allocation
The one thing, among others, that stands out in the Shadow Budget is its expenditure allocation among ministries. While India should continue to invest in economic and social infrastructure projects, there’s a need to rework the transport policy to ensure that we stop funding large vanity projects like bullet trains, and highways with poor utilization and focus on decongesting cities and improve railways services.
While it’s not possible to reallocate resources, particularly for capital outlays in the current year, as they are multi-year projects, we must still slow down the rate of investment. Rather, we should increase allocation under PM-Kisan, as we can’t even provide fair prices for MSP crops and reduce producer subsidies for fertilizers and increase minimum support prices to compensate farmers for high input costs. Increase allocation for higher as well as school education for improving the quality of teaching, maintenance of infrastructure and convert contract employment to government service.
India remains a lower middle-income country, and we must create large-scale employment, prioritize investment, in collaboration with state governments, in education, health, sanitation, public housing and public distribution over vanity projects. Any increase in government jobs will raise the quality of earnings and improve the quality of earnings for households. While it’s important to invest in digital infrastructure for public services, it does nothing if the quality of telecom services is poor, and the cost keeps increasing by the year.
Resource mobilisation
As for resource mobilisation, the key is to lower the tax burden on low and middle-income families, discourage speculative investment in financial and real-estate markets, encourage investment in cutting-edge technology for global markets and not lazy manufacturing and encourage public sector to invest for India’s growth.
First up, it’s high time we redesign the capital gains tax structure. Currently, it rewards speculative investment in financial as well as real-estate markets. To encourage long-term capital formation, the holding period for financial assets must increase to 5 years and that for residential properties to 7 years. In addition, we must also treat capital gains and income on debt the same way as the investment in equity. Even Sebi has identified speculative investment in financial markets as a macro concern.
With regards to corporate tax rates, the tax cuts should come with conditions, such as linking them to employment-generating investment that focuses on greater value-creation through innovation. Low taxes for businesses that drive margins through labour or regulatory arbitrage is not the best use of public money.
Currently, corporate taxes account for 49.6% of direct tax collections, down from 61.8% in FY14. As per official data, gross tax income for companies saw 19.8% CAGR between 2018 and 2023, while income for capital gains saw 42.4% CAGR. Lowering corporate taxes has helped lower tax cost of corporation from 31.1% during assessment year FY20 to 22.8% in FY23.
On the other hand, households now contribute 72.7% of tax collections (personal income tax and indirect taxes), up from 68% during FY19, first full year of GST implementation. At a time when the households are struggling to grow their incomes, the tax burden is increasing. As data shows, income for tax-paying individuals rose by 12.8% between FY18 and FY22, but the tax liability grew at a CAGR of 15.8%.
Meanwhile, the non-tax revenue largely in the form of RBI and PSU dividends, has contributed well. But RBI’s bumper surpluses are driven by higher global and domestic interest rates, increase in bank and central government balances with RBI. A surplus every year isn’t as sure as day follows night. Likewise, even if the government wants to balance its books by getting Public Sector Banks (PSBs) to pay higher dividend, it makes sense to reinvest that dividend back in PSBs who need capital for growth.
In summary, our budget must focus on rebuilding our ability to grow. Fiscal consolidation, as desired by local and global financial investors, can wait. We are not a major foreign currency borrower and hence it is not necessary to worry about rating upgrades. Rating upgrade must not become another vanity project. Financial markets may get upset for a while, but they have been in the over-valuation zone for just too long. Any policy that inflates asset prices from the present level will only cause the bubble to be inflated beyond reason. Rupee may depreciate and that is not a bad deal either – it will help lower the level of low value-adding imports and hopefully encourage local manufacturing in labour intensive sectors.
