Low consumer demand, a slide in investments and troubles in the banking sector should prompt the government to recalibrate taxes and expenditure. It is also important to ramp up spending on health care and education, says CII president Sumit Mazumder.
Over the last year, the economy has sent out mixed signals on growth and stability. While emerging economies, in particular China, witnessed moderation in growth, the Indian economy too faced weak consumer demand and moderate investments. Budget 2016-17 must factor in several evolving trends and strengthen growth boosters.
The government has taken multiple steps across several areas to revive investor sentiment and encourage consumer demand. In the last Budget, the government stepped in to compensate for subdued demand conditions and postponed its fiscal deficit reduction road map.
Through the year, efforts have been underway to revive large stalled projects and increase public investments in infrastructure areas. The government has also commendably adhered to the commitment to maintain fiscal deficit at the targeted level of 3.9 per cent.
Yet the domestic economy has not quite recovered from a period of deceleration and faces multiple challenges such as low consumer demand, moderation in investments, troubles in the banking sector and decline in exports. The Budget would need to calibrate taxes and expenditures to best address these issues.
The crucial question is whether the Budget would once again pause on the fiscal deficit reduction road map. From the perspective of industry, we feel that staying the course on fiscal consolidation is central to macroeconomic stability. Past experiences clearly show that excessive government spending is unsustainable. Credibility of the government on macroeconomic prudence is eroded and consumer and investor confidence is adversely impacted.
Keeping the fiscal deficit at the targeted level of 3.5 per cent for 2016-17, as promised in the last Budget, need not necessarily compromise government stimulus. The government can find room for enhanced public spending in sources such as disinvestment, better subsidy management and widening of the tax base. The JAM trinity of Jan Dhan Yojana, Aadhaar and Mobile can be accelerated and rolled out to more direct subsidy transfers in the coming Budget to reduce leakages.
The savings thus generated, as well as proceeds from disinvestment, may be directed towards bridging the consumer demand gap, particularly in rural areas hit by two successive droughts. The construction of roads under the Pradhan Mantri Gram Sadak Yojana and additional irrigation facilities through the Pradhan Mantri Sinchai Yojana would help infuse funds in villages as also open up vital transport linkages and offer protection from the vagaries of monsoon rainfall.
It is also imperative that spending on health care and education is substantially stepped up in order to build capacities of the next generation and meet obligations under the United Nations Sustainable Development Goals. Educational infrastructure and teacher capacity-building should be directed at ensuring quality outcomes. The objective of universal health care can be accelerated by expanding insurance schemes.
On the taxation side, consumer demand can be encouraged by raising the exemption limit under Section 80C of the Income Tax Act on investments up to Rs 2.5 lakh from the current Rs 1.5 lakh. Given that low-cost housing would be a big multiplier, it is recommended that deduction on interest for housing loans should be set at Rs 50,000. Also, housing loan repayment may be covered separately and out of the purview of exemptions under Section 80C.
The second challenge, relating to moderation in investments, can also gain from public spending. The sharp drop in the investment-to-GDP (gross domestic product) ratio by eight percentage points is a chief concern, and all efforts should be made to bring it back to its peak level of 38 per cent. Industry is enthused by the rapid progress on roads and highways construction and we expect this would further gather pace through Budget 2016-17. The reforms in the power sector may be difficult to implement, but once done, would open up more capacity.
However, the real task for the government would be to revitalise private sector investments and facilitate their dispersion across sectors and regions. A calibrated mix of direct and indirect tax steps can be taken to reinforce investor sentiment.
On the direct tax front, a road map for reducing corporate tax rates should be speedily announced and actioned. CII is of the view that corporate income, which currently suffers from one of the highest tax rates among emerging economies, should be brought down to 22 per cent, including all cesses and surcharges, over a designated period. A strategy for phasing out exemptions and incentives must be announced to add clarity to the process. Further, the Minimum Alternate Tax, which stands at over 21 per cent, should be disbanded in phases. We hope the Budget will kick-start the process of consultations on these issues.
The backlog in AAR/APA applications is impacting investor confidence and should be cleared expeditiously. The rollback provision in the APA Scheme has not yet been issued and draft provisions should be prepared for consultation.
Regarding indirect taxes, excise duties have been raised and lowered in the past, in line with demand and investment requirements. Currently, the general rate of excise duty stands at 12.5 per cent. There may be a temptation to raise this in advance of introduction of a higher goods and services tax rate, but the Budget would do well to maintain it at the current level. Likewise, the service tax rate, which was increased in the previous Budget, should be retained at 14 per cent, as further increase might impact overall consumption and investment patterns.
The steep drop in exports is a matter of concern. Retaining the peak customs duty at 10 per cent would offer some protection to manufacturers, who suffer from high transaction costs and taxes. Anomalies and inverted duty structures that continue to exist may be rectified while those arising from free trade agreements with other countries would need to be examined closely.
Troubles in the banking sector have hampered credit off-take, particularly for small and medium enterprises. The government and the central bank should work together to form a National Asset Management Company that can take non-performing assets off the balance sheets of banks and revive the credit cycle. The Budget should continue on the track of developing a deeper and stronger corporate bond market.
Indian industry welcomes the positive reform measures and innovative campaigns instituted by the government in the recent past. We look forward to another progressive Budget this month.<hr>
Sumit Mazumder is president, Confederation of Indian Industry