Challenges Before the Budget

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