Budget should unfurl reforms that allow 9% plus growth rate
Shachindra Nath February 25, 2015The Modi government's first full-year Budget due on February 28 is widely expected to deliver a credible medium-term fiscal consolidation and growth revival plan for India. While we expect the FY15 fiscal deficit target of 4.2 per cent to be met despite soft tax collections, I expect the Budget to stick to the fiscal consolidation roadmap with the fiscal deficit target for FY16 at 3.6 per cent of GDP. However, unlike past years, the revenue and expenditure targets in the Budget need to be realistically framed. At the same time, the Budget should spell out a credible fiscal consolidation strategy over the medium term, which is both highly anticipated and required.
Given the political mandate with this government, the Budget should unfurl a series of wide-reaching reforms that break the shackles and allow the Indian economy to move towards 9 per cent plus growth rate. These reforms will also enable India to take a pre-eminent place among emerging economies and help attract large dollops of investment.
Some of the structural reforms needed in this Budget include concrete roadmap for implementation of Goods & Services Tax, tax incentives to the manufacturing sector under its 'Make in India' programme, and specific measures to give impetus to low-cost housing.
Low-cost housing is high on the government's agenda and it plans to replace slum clusters with low-cost housing by 2022.
The Budget is also expected to improve tax administration by widening the tax net and correcting inverted duty structures. Financial savings are also likely to get a boost since domestic savings as percentage of GDP has declined from 36.8 per cent in FY08 to 30.1 per cent in FY13, led by a sharp drop in household financial savings as more people resorted to purchasing physical assets. I expect the Budget to further relax the threshold limit under Section 80C, reduce the tenure of term deposits to claim tax deduction to three years, raise tax exemption limits for various allowances, and increase the deduction limit for health insurance premiums.
Among other measures, the Budget should reduce Minimum Alternate Tax from the current 18.5 per cent on Special Economic Zones to incentivise investments in the sector. It must also take advantage of the current sharp drop in oil prices and rationalise subsidies on fuel. Along with subsidy rationalisation, extension of direct cash transfer coverage is crucial to prevent leakages.
With the expected drop in the subsidy bill to 1.6 per cent of GDP from 2.0 per cent in FY15, largely led by the decline in oil subsidies, the government will have the leeway to step up capital expenditure and thus support economic growth amid still weak corporate sentiments. A higher capital expenditure will allow the government to create long-term assets, boost demand and create jobs.