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Continuation of Under-taxation and Under-spending

Budget 2016

Yet another opportunity--this time blessed by windfall gains from lower global crude oil prices--has been bypassed. Budget 2016 sticks to fiscal consolidation and ends up producing a budget where off-budget borrowings help the numbers showing fiscal rectitude and the budget unrealistically increases tax revenue, and within that focuses on the more regressive indirect taxes.

During the run-up to the presentation of the Union Budget for 2016–17, analytical studies put out by official publications as well as in academic circles had been fairly unanimous in identifying a few aspects of the malaise in India’s fiscal and macroeconomic scenes, which call for urgent attention. And the expectation was that Union Finance Minister Arun Jaitley would not miss the opportunity this time to begin to introduce corrections.

Key aspects of the malaise widely recognised were: (i) acute and growing inequality in the distributions of urban incomes and assets; (ii) distortions in the patterns of taxation giving greater emphasis on indirect taxation as against direct taxation; (iii) unduly low tax–GDP and public expenditure–GDP ratios relative to comparable countries; (iv) unduly low level of marginal tax rates on individuals, dilution of progressivity with reductions in the number of tax brackets, repeated raising of exemption thresholds resulting in reduced numbers of taxpayers, low levels of effective tax rates on companies, and almost a complete absence of property taxes covering taxes on wealth, estate and inheritance; (v) public expenditures in India on human capital, that is health and education, taking the combined finances of the centre and states together, have been the lowest amongst BRICS and even lower than both OECD and emerging market economies; and (vi) investment in physical infrastructure being unduly low and lagging far behind such comparable countries as China. As a consequence there have arisen serious bottlenecks in the way of implementing a better spread of development sectorally, regionally and even by economic and social classes. For the pages of this journal all of these concerns have been repetitively aired in one context or the other (Shetty 2009, 2010). At the Ministry of Finance, we now have one of the most research-based and thoughtful Economic Surveys (ES) ever produced as a pre-budget document providing concrete inputs for the budget formulation, articulating all of the above concerns. The ES also makes a very balanced judgment on fiscal consolidation issues, suggesting a valid alternative of “equally good arguments for a strategy of moderate consolidation that can avoid a major negative demand shock to a still fragile recovery” (p 25).

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