23 Feb 2016 22:02 IST

A tale of two Budgets

The Finance Minister must aim to prevent the flight of foreign investors from the market

Of late, the overarching concern or delight (depending on whether one is a net energy exporter or importer) has been the unprecedented fall in the price of crude oil and the consequent fall in the price of commodities. Though India is a net importer of energy, major exports predominantly feature processed petrochemical goods.

Thus, the reduction in oil prices has also meant a fall in the revenue garnered from the export of processed oil products. Due to this, the trade imbalance has not shrunk significantly. And the reduction in oil prices is more of good fortune for the Government than anything else.

The stories of the last Budget

Talking about the last Budget and its upshot, the increase in service tax from 12.36 per cent to 14 per cent definitely helped the Government earn larger revenue. The cleaning cess of 2 per cent for Swachh Bharat also helped the Government accumulate funds. However, the reduction in corporate tax from 30 per cent to 25 per cent has not worked wonders for the Government, mostly because of the flight of investors from India owing to the slow economic growth of China, and the lack of positive sentiment among investors regarding the developing economy.

Keeping in view that the price of crude oil has fallen so low, it is disconcerting that the Government has not shown enough enthusiasm for subsidy reforms.

What to expect this year

Moving to the expectations of this year’s budget, it is highly anticipated that Arun Jaitley would try manoeuvres to stop the flight of foreign investors from the Indian market. Certain tax benefits could be accorded to them, such as the reduction of the minimum alternative tax from the current 18.5 per cent. There is also talk of whether to stick to the avowed fiscal deficit of 3.5 per cent, or to go for infrastructure development.

Given the slowdown in the economic growth of China and the loss in sentiment of foreign investors in emerging markets, it is recommended that Jaitley goes lax on the target of the fiscal deficit and invests in the infrastructure development. This would also bring back positive vibes of the investors, and would also be helpful in the long run in making India a developed nation. The Government could also introduce subsidy reforms as a major part of its spending goes in subsidising products.

A delay in the implementation of the Seventh Pay Commission may also prove effective, since the Government is already hard-pressed for funds, given the level of debt that besets India Inc.

Implementation of the GST in the current fiscal year is also highly desirable as it would significantly increase the base level of people paying taxes.

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