Lower Taxes, Lower Spending — Prof Prasanna Tantri On Budget 2025 Expectations

Swarajya looks ahead to the much-anticipated Budget 2025 on the magazine's What This Means podcast, featuring host Diksha Yadav and Professor Prasanna Tantri.

They discuss pressing questions about tax reforms, government spending, and economic growth.

Tantri sheds light on the complexities of the goods and services tax (GST), the challenges of tax collection, and the crucial need for investment-driven growth.

So, what does India need from Budget 2025?

Read the edited transcript below:

Diksha: Let’s start with GST because it has taken over the complete debate about whether the GST system is good or more complex, especially with items like popcorn — caramel popcorn, salted popcorn, packaged popcorn — coming in different GST slabs.

I want to understand when GST came, what problem did it have to solve? Because now it feels more complex. According to you, did it solve the problem for which it was introduced? Do you think it needs further simplification, or do you feel it’s doing its job right?

Prasanna: Definitely not doing its job right — that’s out of the question. But we have to understand it’s a work in progress.

Many people have forgotten that before GST, we used to have 15-20 taxes. One of the good things, which is paradoxically becoming a negative publicity issue, is that GST is transparent.

Earlier, you would never know excise duty was built into prices; you would never know what your tax was. Now everything is transparent.

The promise when they introduced GST — and it’s not that new anymore, it’s (been) eight to nine years now — was that we needed four to five slabs because we were merging so many taxes into one. You couldn’t suddenly bring everything into one or two rates; you wouldn’t know what would happen to tax collection.

I am sympathetic to that starting point where they began with multiple slabs. But the promise was that we would progress into a simpler structure with easier compliance. That, I don’t think, is happening.

The problem is not GST. The problem is the tax collection target. Look, if you have a bigger budget, if you have bigger spending, you need more taxes. If you give the tax authorities high collection targets, then you can’t tell them not to issue notices or not to harass people.

Imagine you’re the finance minister and I’m your tax collector. You tell me to collect 20 per cent more than last year, then you can’t tell me don’t issue notices, don’t harass people. I will ask you how to achieve it.

The root cause of the problem, as we discussed last time, is high government expenditure. Once you have high government expenditure, you either need more taxes or you have to borrow more. There’s no other way.

People have to understand this. If you have to collect more taxes, then you will go after people and find these small things. You know, the sugar thing that you’re talking about — can I extract Rs 1 here, can I extract something there?

Unless they reduce expenditure, I don’t see how it’s going to simplify. It’s not a GST problem. It’s a total government spending problem that has to come down.

They have to simplify. They should reduce slabs. They should start from five to four.

And more importantly, when they go to the field, they will notice some issues. Let’s say you’re the tax officer. You will see somebody’s evading some tax here and there. You need to learn to neglect some small deviations. There is no way you want to collect 100 per cent of all taxes from everyone.

Diksha: Right. I was in a (X) space yesterday where they were discussing businesses, and all the founders were there. One person, who had done most of his business in China and is now selling mixer-grinders in India, was talking about the hurdles.

He said, “I want to build in India because it’s a huge market, but in China, every process gets done within a day. Here, it takes a week, and you have to pay at every level — panchayat level and everywhere. Even if you have no tax evasion, there are still so many hurdles.”

Prasanna: Yes, and as long as you have steep targets… I’ll tell you one specific instance, because I also go to the field and talk to a lot of people. The government recently made an amendment that after a certain number of years — maybe five or six years — you can’t rake up old cases. Now, the government may have been well-intentioned, but there was an exception to this rule. I think it was Section 73, which said if they suspect fraud, they can open up old cases.

You know what’s happening in the field? A lot of Chartered Accountants told me they are now getting notices under fraud for what would have previously been normal tax notices. Because the source of the problem is steep targets — if I have to collect this much money, then I have to go after you.

All these Laffer curve discussions are nice talk, but nobody’s going to pay tax voluntarily. The only solution is cutting taxes and lowering spending.

Diksha: What signals are you looking for in the Economic Survey and the Budget?

Prasanna: I’m looking for a big shift now. I’m reasonably confident, because of the chatter we’ve heard so far, that there may be some cut in taxes. I think that’s coming — the government has realised this. But what I worry about is, there won’t be any cut in expenditure.

What I want is to start cutting expenditure. The total budget last year was roughly Rs 48 trillion (Rs 4,800,000 crore). If you don’t do anything — let’s say it’ll grow by 10 per cent this year — from 48, it would become 52 or 53, following nominal GDP growth. I want to see that number being less than 50, which means you’re first not going to spend (the) Rs 300,000 crore which you would have spent otherwise.

My hope is that we keep the tax collection target close to last year’s number or slightly more, which means you’re making a tax cut of around Rs 300,000 crore and an expenditure cut of Rs 300,000 crore.

I’m very optimistic about the first one and not at all optimistic about the second one. Everyone likes the suggestion of tax cuts, but nobody likes expenditure cuts.

Diksha: Also, if you see all over the headlines, everybody’s expecting changes in income tax. You’re also in favour of lowering taxes, and one reason is that it will boost consumption significantly. But last time, you also suggested that it’s a short-term solution.

Prasanna: That consumption argument… we don’t have a consumption problem long-term. The question, Dikshaji, is what are we looking for? Are we looking for next two-three-quarter growth, or are we looking at Viksit Bharat 2047?

If your horizon is the next two-three quarters, I agree that boosting consumption will lead to higher growth. But if you’re looking at Viksit Bharat, consumption is not the solution.

I’ll give you a simple example. In 1950, we used to consume 90 per cent of our GDP, and our growth rate was 2-3 per ent. Our growth rate substantially increased as we increased savings. What leads to long-term growth is not consumption; it’s investment. It’s not your eating that creates growth; it’s your working that creates growth. It’s your research that creates growth.

In the long run, you have economic growth for only two reasons: investments and productivity improvement. Investment requires savings, and productivity requires innovation. There is no other way. Think about artificially boosting consumption — in the short run, it might look good, but eventually, it leads to inflation because people will demand higher wages for increased work.

Diksha: But Prasannaji, these problems that you’re mentioning... if we look at pre-2014 — because this government has been around for a decade now — what was the situation then, and how much have we improved?

Prasanna: On the previous point about FDI, we have to go all out on FDI. We have to reconsider this policy of not taking Chinese money at all. We have to think about some creative way where we don’t give them ownership but get their money because their savings rate is 45 per cent.

Now, about the pre-2014 period — specifically 2004 to 2014. Up to 2008, things were fine. Although there were communists in the government, the reform process continued, and the economy grew really well.

But post-2008, it was very different. The farm loan waiver that happened in 2008 started a trend of expanding all kinds of expenditure, and the period became known for policy paralysis and corruption — 2G and so many other scams.

The biggest casualty was the banking sector — what Modi calls “phone banking.” Anyone could get credit. Bank credit growth went up to 30-35 per cent in those years. Willful defaulters could take money, and banks didn’t recognise losses. By 2014, the banking system was severely compromised.

From a macro point of view, what deteriorated from 2008 to 2014 was our efficiency. There’s something called incremental capital output ratio. Up to 2008, to generate 1 unit of output, we needed around 4-4.5 units of capital. In developed countries, it’s 3. By 2013-14, we went to 7.5 — our efficiency died. Although we had a high savings rate then, these investments were unproductive — zombie investments.

Post-2014, what has improved is efficiency — we’re back to 4.5-5 incremental capital output ratio. That’s why people say it’s better than before, but we’re not yet at developed-country levels because we need to get to 3. What has become worse, and it’s not necessarily the government’s fault, is our savings rate has gone down.

Diksha: Did Covid play a part in this, or was it also the case before Covid?

Prasanna: It started in 2008-09. We peaked with savings of 40 per cent then. Whether it was the banking crisis, people losing faith in banking, or demographic or structural changes, I’m not sure. But systematically, savings have been going down every year.

During Covid, it went down significantly, which is understandable, and it has come back a little, but it’s been a secular decline since 2008-09.

The big change now is that we’re using money efficiently for investment, but we have less money. And sadly, the government hasn’t fully recognised this. They’ve made things slightly worse by changing the income tax system. Although we need simplicity in GST, there was a reason for the 80C deductions and housing benefits. I’m in favour of reinstating these rather than cutting tax rates. I know these options still exist on paper, but the government wants to move to the new tax system without exemptions.

The number-one requirement for India right now is savings, not consumption. We need to think about ways of incentivising savings. From 40 per cent, we’re down to 32 per cent. Consumption won’t create savings. Savings lead to investment, investment leads to production, production leads to consumption.

Of course, there are times when people get depressed and don’t consume — then you need to promote consumption, like in China right now. But promoting consumption is for crisis times, not normal times. In normal times, you grow by investing and being productive.

Diksha: Talking about production, one of the hero schemes of the government is the PLI (production-linked initiative) scheme. Do you feel this scheme will expand further? Will more money be given to this, and what is going to be there for small and medium enterprises?

Prasanna: I understand that in some sectors, when you want to promote something like mobile manufacturing that isn’t present, you might need schemes like this. But this cannot be the mainstay policy for private investment. PLI has been around for four to five years now, but look at the RBI (Reserve Bank of India) survey I sent you this morning — the private sector is unlikely to invest next year as well.

We have to distinguish between individual investments by large firms and overall investment. A lot of people celebrate when some conglomerate builds an airport, which is good, but that’s different from overall investment by everybody. That won’t happen with these kinds of schemes.

The first thing required for investment is access to capital. Think about it — if you’re an established player and I have an idea, I have to compete. One thing that happened after 2014 is a dramatic decline in industry concentration levels. Before Modi, the HHI (Herfindahl–Hirschman index) index showed very high concentration — most industries had two-three players controlling the market. This was driven by access to natural resources.

Contrary to talk about Adani-Ambani and crony capitalism, concentration actually went down. The Insolvency and Bankruptcy Code (IBC) is the most anti-crony-capitalist measure you can think of. If you default, you lose your firm. No crony capitalist would ever introduce IBC.

Earlier, you had BIFR (the Board for Industrial and Financial Reconstruction), where you could loot banks. That was a big achievement, but sadly, after Covid, the concentration is increasing again.

My diagnosis of why investment isn’t happening is simple: market power of existing players is increasing. Take airlines, for example. It’s now a duopoly. Why would they expand? A monopolist, even when they sell more, has to cut prices. If Indigo suddenly increases capacity, they have to attract more people by cutting prices, and they can’t just cut prices for one flight — it affects all flights. You’re better off running one flight at a higher price than investing in expansion.

This is what monopolies do — when incumbents have higher power, they don’t want to invest. That’s why you have high profits. I find it laughable when government sources say the private sector is making so much profit but not investing.

Of course, a monopolist doesn’t need to invest. In fact, it’s loss-making for them. High profits and low investment is a textbook case of monopoly.

Diksha: This is the reason for the private sector profiting hugely but not showing it in investments?

Prasanna: Yes, and they shouldn’t invest. If I were their consultant, I’d advise against it. The solution is competition.

One thing I’m uncomfortable with is industry associations asking for high duties and blocking imports. Not every import is anti-national. If an import is critical for security, I understand protecting domestic industries, but otherwise, it’s harming domestic customers.

Access to credit is another major issue, and I blame the RBI as well. Today, if you’re a large conglomerate, you have internal resources. Imagine you have 20 companies within your group — 10 mature companies with excess cash flow can fund 10 growth companies. Large conglomerates also have access to outside capital.

Look at today’s Economic Times; Reliance raised $3 billion from outside at 6 per cent. Now think about a small firm with a good idea trying to compete — they’d have to borrow at 15 per cent. How can they compete?

RBI is fixated on this inflation framework. They want to keep you and me at home, unemployed, to reduce onion prices. Access to capital is the biggest casualty in the last three-four years. Small firms don’t have access to capital. I would go to the extent of saying we need to either abandon this inflation targeting framework or significantly relax it.

Diksha: Just to understand this food inflation part — you had explained the process of calculation is based on literal assumptions for the next year. What’s the solution? What can RBI do, and what can the government do to fix that part? Because food inflation is something people empathise with; they see their cost of living, food consumption, vegetables, fruits — everything has gone up compared to last year.

Prasanna: Let me explain what RBI can do and what they’ve been doing. RBI has only one tool — interest rates. RBI doesn’t get into onion markets or other markets. The way RBI handles inflation, including food inflation, is by hiking interest rates.

There’s something called the neutral rate — a rate at which you have potential employment, where everyone who needs a job has one, aside from some frictions.

If you keep interest rates above the neutral rate, you make many people unemployed, because projects can’t be funded. When you’re unemployed, even if food prices are high, you won’t ask for higher wages.

That’s how RBI is controlling food inflation — by making people unemployed to reduce their bargaining power. If you explain this to people — do you want inflation controlled by making people unemployed? — then they’ll realise RBI doesn’t have a magic wand.

You have to recognise not every problem has a solution. If there’s a short-term rainfall issue, food prices will go up — you can’t do anything. The worst thing is to legislate price controls. But government can invest in supply chains, understand why products aren’t moving between areas of excess production and areas of need.

The farm laws were a great attempt. It didn’t work, unfortunately, but somehow through stealth or piece by piece through states, they need to introduce reforms. We need to attract investments in the farm sector.

Again, it goes back to investment, private investment, making it lucrative for the private sector. Improving supply chains and efficiency in farming will help more than RBI’s blunt method of creating unemployment.

Diksha: So, to conclude, what you’re suggesting and looking for in the budget is something that promotes high investments, FDI, and keeping the CapEx (capital expenditure) the same?

Prasanna: Yes, same as last year. And I have a couple more specific suggestions. It doesn’t mean don’t do infrastructure. What I’m saying is go project by project, bottom-up, not top-down.

A couple of years ago, government created an organisation called "NavFIT" — and I should disclose that I’m associated with Power Finance Corporation. NavFIT is supposed to be a development financial institution. Government funded it with Rs 20,000 crore, and they now have capital of around Rs 30-35,000 crore because of profits. But do you know how much they’ve lent? By end of last year, only Rs 35,000 crore, and that too mostly buying existing loans, not funding new projects.

This is not the way. You need specialised institutions with skilled resources. Public sector salaries have to go up. Today, top management in public sector earns less than or equal to a fresh MBA (Master of Business Administration) from a good B-school (business school), even including perks. That’s nowhere near private sector compensation. You need to attract skilled people.

One thing I would strongly recommend is an interest subvention scheme for CapEx. If something is non-viable because of high borrowing costs, the government could offer 2-3 per cent interest subvention subject to repayment. It’s not a waiver — your interest rate might be 9-10 per cent, but if you repay, it becomes 7 per cent. With Rs 20-30,000 crore, you can fund Rs 5-6 lakh crore worth of projects.

Diksha: Lastly, before we wrap up — will the freebie politics that has seeped in over the last year or two make the situation of the states worse? We’ve seen it in Himachal, we’re seeing it in Karnataka. But now nobody seems to care about it. Every party is offering freebies.

Prasanna: At some low level, it won’t matter. For instance, if Gujarat introduces some freebies, they’re very disciplined with a debt-to-GDP ratio of 17-18 per cent — they can afford it. But if Punjab adds more freebies, that’s different.

State governments have a natural balancing mechanism. They cannot print money, and there are limits on how much they can borrow. If they increase spending on freebies, they have to cut something else. They’ll eventually reach a stage where they won’t be able to pay salaries or pensions. It will become politically unsustainable.

So I’m not that worried about state governments. They’ll have to stop at some level. They can promise anything, but they won’t be able to pay because they can’t print money. The danger is if the national government starts doing it. The national government isn’t bound by anything. They can print money by borrowing from RBI. The worst part is that in the short run, it creates a very positive impact.

State governments aren’t giving stimulus. If I reduce expenditure on one side and increase it on another, that’s not stimulus. Stimulus is expenditure without taxing. State governments can’t create artificial consumption stimulus because they can’t print money, but the central government can.

Initially, you’ll have very positive effects — more consumption, everyone feeling good. But as I mentioned earlier, it will lead to wage increases, then price increases, then inflation expectations. And then you start heading towards Sri Lanka, Bangladesh, Pakistan, and eventually Venezuela.

Diksha: So, assuming tax cuts but not lowering targets and keeping expenditure as it is would be the worst possible outcome?

Prasanna: Yes, my expectation is around Rs 4,900,000 crore. I’ll be very happy if it’s significantly less than Rs 5,000,000 crore. And then tax cuts would be like icing on the cake. But I think there will be only icing. Let’s be optimistic and hope for the best.

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