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February 2022

Looking forward to union budget 2022

Union Budget is an annual financial planning exercise which is conducted by Government of India at the beginning of every calendar year. One school of thought claims that over the years it has lost its significance as an event since the Government can roll out its financial initiatives through the year dynamically instead of waiting to announce it once a year. There is an absolute merit in that argument since we live in dynamic times and therefore policy making has to align with the dynamism of the times. However, at the same time Annual Budget as an event carries an undeniable significance of articulating the vision of the Government of the day. It provides a platform to the leadership of the country to communicate its intent and provide strategic direction for growth of the nation. In that respect it is no less than a townhall meeting convened by the management of a company for its employees or annual general meeting for its shareholders. It’s a great opportunity for forward looking, clear and bold leadership to set the agenda for growth for not just its government but the rest of the country. A growth oriented annual budget like the one we had in Feb’21 could go a long way in triggering a trickledown effect by motivating the leadership throughout socio-economic ecosystems across the length and breadth of the country. In this context the power of the impact of the Annual Budget could be exponential.

Annual Budget making exercise has both tactical and strategic components. Since it’s a statement of projected annual profit and loss account for the country it brings in the tactical lens of prioritizing more pressing initiatives which need to be implemented over next 12 months. While that gets taken care of the strategic direction of this annual exercise has to be guided by the larger purpose of doing this. For any nation in general and a developing country like India in particular that larger purpose could be giving wings to the growth of its economy which leads to wealth creation much needed for wealth distribution across the society thus helping to lift more of its citizens out of poverty. However, while India is ranked 6th globally in terms of the size of its GDP with its per capita income just a shade above USD 2000 per annum it is ranked precariously at 145 on that parameter. China’s per capital income is about 5 times that of India and it still ranks 79 on that globally. This tells us that raising India’s per capita income might be the real strategic purpose which should get leadership’s attention while formulating the annual budget. That only truly would eventually make India Atam Nirbhar. An affluent India would be truly self-reliant and become Sone ki Chidiya again.

In context of the above the growth oriented direction of the annual budget adopted last year should be continued which means budgetary allocations should continue to be channelized towards investing in the growth of the economy instead of subsidies.

There could be 4 pillars which could drive India’s economy over next 10 years. Budgetary allocations should be increased towards these to enhance productivity gains required to build a much bigger economy and therefore higher per capita income -

  • Physical Infrastructure like highways, railways, waterways, airports and ports. These will ensure faster movement of goods and people and therefore higher productivity.
  • Virtual infrastructure like 5G. This would ensure faster movement of data leading to faster decision making and execution and therefore higher productivity.
  • Healthcare infrastructure needs to be strengthened particularly for increasing access for economically weaker sections of the society. This would reduce productivity losses on account of poor health and also loss of savings of individuals and the nation towards healthcare expenses.
  • Education infrastructure needs to be strengthened particularly for increasing access for economically weaker sections of the society. More budgetary allocation is required towards skill-based education. Our education system could enable our citizens to self-employ and create jobs instead of seek jobs. This would directly increase the earning potential of large sections of the population and bring higher number of citizens into the workforce thus directly impacting the growth of national income.

Budgetary allocations should be continued towards welfare schemes like Ujjawala, clean drinking water, sanitation, solid waste management and environment. This would improve the quality of life in our cities, towns and villages and lead to productivity gains especially for those at the bottom of the pyramid.

PLI driven push toward private investment in production should be continued with added incentives for promotion of exports to propel India’s economy driven by the combination of global and domestic demand. History tells us that no nation in the world became rich by catering to only its domestic market. China’s rise over last 3 decades has been driven by it becoming a factory for the world and India’s affluence till the British took over was funded by the exports of our textiles and spices to the rest of the world.

On the revenue front GST has become a game changer in its 5th year post its introduction in 2017. Higher GST collection on lower average GST rate than at the time of introduction tells us about two things – GST compliance has become broad based and growth will happen with greater compliance and not higher slab rates. India’s strength is in its scale and the GST story is telling us that the way forward to solve our chronic problem of low tax to GDP ratio is to rationalize the rate structure further to two slabs – 5% and 12%

On the direct tax front too an interesting story has played out this year - while income tax collections till Nov’21 had grown by 47.3% without any increase in the number of tax filings corporate tax collections during the same period has grown by 90.4% despite much lower tax rate than that for individuals. Just like the GST story this tells us that the way to solve the low tax to GDP problem of India is to improve the size of the cake which is economy and the tax coverage on that increased pie. Higher tax rates on a small base is not the solution not even tactically. Therefore, it is time to bring individual taxation at par with that of corporate taxation. Besides having definitive long term impact on solving India’s tax collection problem this would leave more disposable income in the hands of the citizens and just like corporates they would go ahead and increase their spending creating more demand, more jobs and therefore a bigger economy and higher per capita income.

Capital gains taxation should be simplified by having a uniform long-term and short-term capital gains structure across all categories of capital assets. Capital gains taxation on unlisted equities and real estate should be brought at par with that of listed equities. This would invite more investment capital into these growth asset classes which would then have an indirect impact on the growth of the economy. Story playing out on the GST and direct taxation front will play out in this segment also with increased volume at lower taxes leading to higher tax collections.

Rohit Sarin
Co-Founder, Client Associates