Arun Jaitley Sir,
You will be presenting one of the most important budgets on February 29. Important, because the encouraging atmosphere of February 2015 has today, turned into a gloomy one. Of course, India is not responsible for the gloomy economic atmosphere. It is, in fact, the best performing economy. However some pitfalls still remain.
There are the issues of rising bank Non Performing Assets (NPA), One Rank, One Pension (OROP) and 7{+t}{+h} pay commission expenses, falling private sector CAPEX, falling exports and slow pace of structural reforms. We can also add uncertain oil prices, weakness in EU and Chinese markets, and effects of Trans-Pacific Partnership (TPP) implementation. In this scenario, fulfilling aspirations of 1.26 billion Indians is, by no means, an easy task.
Tax system corrections
To start with, our tax system needs to be corrected. Though there is a continuous rise in both direct and indirect tax collections, only 3 per cent of Indians pay income tax. Our tax/GDP percentage is a dismal 16 per cent — developed countries don’t have less than 30 per cent. This requires movement towards a cashless economy, efficient identification of potential taxpayers and enlarging the tax base.
For starters, the government can spell out benefits and provide incentives to people for moving towards cashless economy, on the lines of requirement of PAN for transactions above ₹2 lakh. It is imperative to give relief to small taxpayers, while taxing the rich more. Famous economist Thomas Picketty suggested the same. It would be beneficial if income tax exemption limit is raised to at least ₹3 lakh. This would encourage consumption of consumer goods, thereby improving domestic demand, which is needed in the current situation of falling exports.
Tax Deducted at Source : The Eashwar panel suggested reduction in TDS rate in various securities, and increasing TDS threshold to ₹15,000. This would be a great incentive to increase savings, and households would not hesitate to put their savings in banks and other Financial Institutions.
This is the time when banks have high capitalisation requirements. This would also arrest the decline in our savings/GDP ratio (currently 28 per cent). We need to urgently raise it to 33 per cent, without which the 9 per cent growth is nearly impossible.
Duty structure : The 2015 budget reversed one glaring fault in India’s duty regime — ‘The inverted duty structure’. Because of the correction, we have seen foreign and Indian companies commit more than $6 billion in the electronics sector in the last one year. Even Indian companies like Micromax, which were manufacturing in China, shifted to their home base. I hope now it is extended to other sectors like capital machinery, iron and steel, tyre manufacturing and other sectors.
Agriculture
Our agriculture is in stress. Though it is not possible to fix everything, you have to begin somewhere — a series of steps is a good start. It is imperative that you spell out a schedule of direct transfer of subsidies to bank accounts. This will not only plug the leakages of fertiliser and other subsidies, but also help phase out commodity-based subsidies, in the wake of WTO deadline of 2023.
Our farmers should be allowed to take advantage of securities and commodity markets. This would not only help in hedging, but also in increasing subsidiary income. Steps need to be taken to give them access and make them financially literate about these schemes.
I urge you to abolish Agricultural Produce Market Committees (APMC), or at least give incentives to the states to do it. Because of the APMC structure, farmers cannot directly sell to big retailers, thus preventing the ryots from making double of what they get from the APMC.
Talking about agriculture, it is also imperative to design a holistic programme of cold chains, warehouses, and logistics. If statistics are to be believed, then 35 per cent of our food is wasted. This can be easily corrected if we start transporting in biodegradable plastics, increase food transport by railway and waterways and provide GPS-based monitoring.
Banking
Government should establish a National Debt Management Company, where NPAs of all public sector banks (PSB) can be shifted. This would help clean the balance sheets and accelerate the recovery process. Though capitalisation of banks is needed, a more effective path would be reducing the government stake and allowing banks to raise money from markets. We don’t need 26 PSBs. You can also look into a scenario of having only five PSBs, by merging the smaller ones with big banks. This would take care of many capital requirements of these financial institutions.
Health
For the past 15 years, we have given impetus only to education, ignoring health. I urge the government to increase its health expenditure to 2 per cent of the GDP, from a mere 0.9 per cent today. Threat of global diseases like Zika, Ebola, and swine flu looms large, and our public health system is in shambles. We need a war-footing reform in healthcare, like the one in education.
Fiscal deficit
Lastly, I would ask of you to not cross the fiscal deficit target of 3.5 per cent of GDP. In this weak macroeconomic environment, we need to be disciplined, so that our future is not filled with high inflation and high debt.