Critical Fiscal Issues Deserve Attention in the Making of Our Budget -- Jiban Mukhopadhyay

Last year today, I mentioned in my LinkedIn post that the union budget is a grand celebration time in India. The pitch of excitement has reached higher height this year, both in electronic and print media.

Print media have focused on competitive page decoration. The oldest economics- based daily newspaper in the country has printed delightful photographs of G20 Heads of States as well as John Lennon and Lionel Messi!

 ‘World comes to India’!

The presentation of the budget by honorable Finance Minister went on smoothly. There was no high decibel protest by the honorable members of the opposition. Sensex moved up merrily by over 1,100 points by the end of the budget speech. 

But Sensex fell and closed for the day with only 158 points gain. Share prices of Adani group companies crashed and eventually they scraped their FPO, thanks to the Hindenburg report.

World has come to India! Right?

By now even those who are not even somebody also know that the budget 2023-24 is a ‘please all budget’.

The parliament election is in the next year -- ‘Mission 2024’.

Yes, there are major income relief. Max rate of corporation tax surcharge also reduced. Both middle and rich class as well as corporates will benefit. Fiscal deficit is more or less is under control.

Total revenue foregone is Rs 35, 000 crore, while additional tax revenue generation is only Rs 3,000 crore.  More cash in hand will help increase demand, which, in turn, will increase supply.  And the virtuous cycle will be on force.

Capital expenditure increased from 2.9% to 3.3% of GDP. Infra projects received higher allocations. Manufacturing in general and MSMEs in particular got some boost. Many new proposals have been announced. Outlays have been laid out for as many as 185 major schemes.

But there is sharp reduction in MGNREGA outlay. Perhaps, Jal Jeevan Mission and PM Awas Yojana would add new dynamics in rural areas as these are asset generating types unlike MGNREGA.

In this context, I intend to raise four basic fiscal issues relating to our budget.

First, increased allocation for infrastructure is essential; it was made in the budget. But investment in infrastructure is long gestation and does not bring in high profit, if at all. It facilitates both public and private investment indirectly once implementation of the project is complete. Example, roads, bridges, power plants, etc. 

Private investment will take place if the overall economic situation in the country and abroad are healthy. Even though we feel delighted to be the highest growth country, our economy is infested with high inflation, unemployment, acute material deprivation, nutrition deficiency, gross inequality, low demand base, inadequate exports and over dependence on imports. Our capital account deficit is as high as 4.4% of GDP.

IMF latest economic outlook (January 2023) has predicted ‘subpar economic growth’ rate in 2023 and 2024: World: 2.9, 3.1 / US 1.4, 1.0 / EU Area 0.7, 1.6 / China: 5,2, 4.5 / and India’s growth rate is highest among all: 6.1, 6.8.

Just because our economic growth could be high, we must not ignore our other critical deficiencies.

Second, everybody is happy everywhere in the country that the burden of income tax would be less. But how many of us pay income tax in our country?

According to official data, 58.3 million income tax returns (return filing for form numbers ITR 1 to ITR 7) have been filed for the assessment year 2022-23. Out of this 58.3 million, 29.3 million or 50% are resident Indians, who earn salary and interest and dividend income. Many of these are ‘zero tax’ returns.

Returns form numbers ITR 2 to 7 are filed by various categories of individuals, corporates, trusts, etc. 

Our population is estimated to be 1,417 million by the end of 2022. Income tax return filing population of 58.3 million is only 4.1% of our total population; and 29.4 million individuals who filed income tax returns are just 2% of our population.

For the sake of simplicity, let us assume that this 4% of our total population, who filed return for the assessment year 2022-23, are included in the top 10% rich population. They acquire 65% of wealth and income of the country as many researchers have made this point. The blessed ones!

Thus, the ‘please all budget’ actually tries to please this meagre 4% of Indians, or only 6.4% of our 912 million total eligible voters.

What about the remaining 96% of Indians or 93.6% of voters? In fact, they are our real ‘Aam Janata.’ They have been left out from budget ‘freebies.’ They belong to the ignored India.

Third, we know that 50% or about 708.5 million Indian are the deprived majority owning just 6% of income and wealth. 

We also know that total working population is 471 million (Census 2011); this number have increased by now to about 522 million in 2022.

Out of total workers, only about 28 million, or even less, are employed in the organized sector. Thus, 494 million are low paid workers in India’s unorganized sector. They are also real ‘Aam Janata.’

They run the wheels of our economy by their blood and sweat. They have been badly hit, first by demonetization, and then by COVID-19 lockdown; they are yet to recover.

Sure, they will move ahead – on their own.

Finally, it is observed that our budget is highly depended on ‘borrowing and other liabilities’, constituting 34% of total receipts in 2023-24 (BE), while direct and indirect taxes to contribute 58% of total receipts. Seven years ago in 2016-17, these numbers were comparatively lower at 21% and 63%, respectively.

Meanwhile, the size of the budget has increased from Rs 19.8 lakh crore in 2016-17 to over Rs 45 lakh crore in 2023-24, or by 2.3 times in seven years.

Government’s interest payment has increased from Rs 4.9 lakh crore to as high as Rs. 10.8 lakh crore during the above-mentioned period, or by 2.2 times in seven years.  

Obviously, we are in an internal debt trap. This has been going on for many years.

There is an urgent need to address the critical issue of debt trap.

Should we not make a move to increase our tax revenue, not by raising direct tax rates, but by widening the tax net?

Should not more than 4% of our population file income tax return?

Looking at the growing economic activities around us, it can be inferred that there are many more people who could be brought to pay income tax at reasonable rate.

Why not take up these important issues as ‘moral equivalent of war’ in our future budgets?

February 4, 2023.