What is the issue?
As the budget time is nearing, it becomes essential for the government to assess some challenging factors that exists in the economy.
What are the challenges?
- Oil Prices - Oil prices have risen to $68 per barrel, much higher than the anticipated levels.
- It naturally calls for the government to reducing the taxes on petro-products.
- However, the resultant impact on fiscal deficit and inflation has to be taken into account.
- The dangers may not threaten macro-economic stability, as has happened in the past, but they may impact growth.
- This will be the obverse of the growth bonus that the country got in 2014-16.
- The period saw oil prices fell considerably and GDP growth peaked at 7.9% in 2015-16.
- Inflation - Higher inflation at present is threatened also by higher food prices.
- It makes it impossible for the Reserve Bank to cut interest rates in the foreseeable future.
- Deficit - A higher-than-planned fiscal deficit would add to the already rising curve of general government deficits.
- It could also possibly raise the bond rates higher than their already elevated levels, to meet out the deficit.
- Growth - The “advance” GDP figure for the current financial year, projecting growth at 6.5%, is short of earlier expectations of 6.7%.
- Next year’s growth rate is likely to fall short of the 7.4% predicted by the IMF, but should cross the 7% threshold.
- This is expected to come largely as a benefit of a low base and by a recovery in exports.
- Consumption demand is also considerably lower than the needed level to boost growth.
- Revenue - The above factors indicate an overall low revenue potential in the coming period.
What could possibly be done?
- Expenditure control must logically be a necessary measure to tackle the low revenue.
- This is especially given the uncertainty of when the GST revenues would rise to the budgeted level.
- The government should also look for new revenue sources that have not been tapped so far.
- The most obvious of these is long-term capital gains on shares, to match the tax on capital gains accruing from other classes of assets.
- The estimates of tax forgone on this item run into hundreds of billions.
- This unfair tax holiday for just one class of investors, those who put their money in shares, should not be let to continue.
- However, such a tax would not be free of risk as overseas investors might choose to look elsewhere.
- Nevertheless, a deferred and phased introduction would not affect the market or the investors.
- This could minimise the incremental tax burden as well as prove to be a potential source of revenue that the government is in dire need of.
Source: Business Standard
