Five Imperatives Of Budget 2023-24

We are less than four weeks away from the presentation date of the 2023-24 Union Budget, 1 February.

What will separate this budget from previous efforts is that it comes against the backdrop of great uncertainties about how the next fiscal year will unfold.

We don’t know if the world will slip further in recession and slow down trade.

Europe and Japan are a near certainty, but the jury is out on the US. We don’t know how long the Ukraine war will continue, since no efforts are being made to end it.

We don’t know in which direction capital will flow, and what will happen in the nine assembly elections coming up. And these are only some of the events whose outcomes are difficult to predict.

However, on the plus side, tax revenues are holding up, growth seems unlikely to fall below 6 per cent in the next fiscal, capital investments are slowly picking up, the stock markets are holding up, and business sentiment is still positive. Which gives us something to work on.

Budgets tend to have many objectives, but the five most important ones this year could be the following.

One, given the uncertainties, the fiscal deficit target should be stated in a range rather than be reduced to something specific like 5.8 per cent.

We should be able to keep it on the higher side if growth falters too much, and we should stick to the lower end if we get at least 6 per cent growth. The range I would recommend is 5.8-6.1 per cent.

Two, we simply must rationalise our capital gains taxation regime, which is too complex and too arbitrary to allow for a sensible allocation of resources by both individuals and corporations.

There are too many rates, too many tenures for defining long- and short-term, and too many variables.

For example, in equity, short- and long-term rates are 15 and 10 per cent if shares are sold in the market and securities transaction taxes paid.

It’s different for unlisted shares and other types of equity. The rates for debt vary from 10 to 20 per cent, depending on whether you have bought and sold listed bonds, or invested in non-tradeable bonds or debt mutual funds.

The latter have inflation indexation, but not other types of debt.

Also, property attracts 20 per cent with indexation, but after two years, while for debt it is three years to qualify as long-term.

We clearly need to move to a simpler and cleaner regime. My suggestion would be 10 per cent for long-term gains, and 15 for short-term, with all long-term gains qualifying for indexation.

Three, the new alternate income tax scheme, with lower rates and practically no deductions, has simply not caught the imagination of taxpayers.

Many experts, including the Chairman of the Economic Advisory Committee to the Prime Minister, Bibek Debroy, have called for incentivising taxpayers to make the switch.

The best way to encourage a switch may be to give any taxpayer a huge rebate in the year in which he or she makes the switch, but with the rider that there can be no switchback for five years.

Hopefully, many taxpayers will see the simplicity of tax filing and compliance as an advantage in itself, outweighing the marginal tax savings from the investing in specified instruments and avenues.

Very often these deductions tend to misdirect savings flows.

Four, the Finance Minister must bite the bullet on tax bracket indexation. While it may be politically attractive for Nirmala Sitharaman to spring a pleasant surprise on taxpayers while making her budget speech, indexation implies greater predictability.

The indexation can be done once in two years, and she can anyway retain the right to announce the new index numbers in her budget speech.

In a year in which inflation went well above the Reserve Bank of India’s comfort zone, Budget 2023-24 is the right one to make indexation a reality.

This year she gets both the right to make a politically advantageous statement on raising the tax brackets and to announce the indexation reform.

Fifth, privatisation has been making very slow progress, despite the Modi government’s political commitment to soldier on. It is far from clear if the IDBI privatisation will happen this year or the next, or even the smaller one of Shipping Corporation.

Many banks which were not part of the strategic consolidation process (Bank of India, Bank of Maharashtra, for example), need some indication on when they will be sold off or merged with the six public sector banks that will always remain with the government.

These six banks — SBI, Punjab National Bank, Bank of Baroda, Canara Bank, Indian Bank and Union Bank — should be encouraged to raise a lot of equity this year from the markets, as equity can be raised at good premia.

Sitharaman should nudge them to raise more equity, and not just debt through AT1 or tier 2 bonds. It would be criminal if banks raised debt instead of equity when the going is good.

There may be other budget imperatives, but the Narendra Modi government has tended to make the big moves outside budgets.

For example, the merger of the Garib Kalyan Anna Yojana with the National Food Security Scheme could easily have been announced in the budget, but it came in December.

But there are still important things that budget can do. And it must.