New Delhi: Finance Minister Nirmala Sitharaman presented the first budget of Modi 3.0 and middle-class taxpayers were expecting some tax cuts.
Their expectations were genuine because the government got bumper non-tax revenue in the form of dividends from RBI and GST collections are also rising.
The central government is no longer under any obligation to meet the GST revenue shortfall even if it goes down and the government is in a better fiscal situation.
If we decipher the budget proposals, it appears to be good for macro-economic stability and there is stress on infrastructure development push, skill development, employment generation, climate change, ease of doing business, promoting Research & Development (R&D) etc. which are very much needed and FM deserves the applause.
The economic survey highlighted that though there has been improvement over a decade but still only 51.25 per cent of college pass-out is deemed employable.
Similarly, artificial intelligence is the next big opportunity as well as a threat for India and therefore creating a pool to promote R&D in collaboration with the private sector was desired.
If we compare our R&D spend then we lag far behind the US, China etc. and if India were to grow then we must spend more on innovation. From a perspective, our exports have a very low value-add component and though on the face of it, the numbers may look nice but corresponding economic indicators will not move.
Major initiatives taken in the past are yielding consistent returns. For example, IBC has helped in the recovery of ~Rs. 3.3 lakh crore to lenders and cases involving ~Rs. 10.2 lakh crores were settled at the pre-admission stage itself.
Similarly, more than Rs. 38 lakh crores have been transferred since 2013 under the direct benefit transfer (DBT) scheme. Free rationing and other social schemes have helped ensure food security and reduce multidimensional poverty. There is a continued focus on social welfare in the budget.
DBT scope is now expanded to accelerate employment generation which has always been a point of debate. Economic survey shows that there is job loss in the MSME sector and budget proposals widening the scope of MSME credit. Only time will tell how efficiently these schemes are implemented and what outcome they generate.
Earlier RBI and now economic surveys have highlighted that massive tax cut given to the corporate sector in 2019 is yet to show any impact on the economic activity. Corporate profit has quadrupled from FY20 to FY23 and corporate profit to GDP ratio is at 15 years high in FY24.
Tax rate reduction is a major contributor to healthier corporate balance sheets but there is no commensurate increase in employment or investment. Capex push for the last few years is shouldered alone by the government and private sector spending is muted.
Gross Fixed Capital Formation (GFCF) for the private sector has picked up pace but we do not know how much of it is maintenance capex and how much is related to an increase in capacity which will help job creation.
Of course, capex is dependent on the demand scenario and the government should understand that tax cuts are just one of the many factors which influence the investment. This was a time to look back and link the incentive with economic contribution.
Even in this budget, many tax concessions are given to the corporate sector. Abolition of angel tax which was often criticized by start-ups and was initially introduced to curb the round-tripping, withdrawal of equalization levy (often called as Google tax), reduction in the tax rate of foreign companies from 40 per cent to 35 per cent, rationalising income escaping assessment etc. are good steps and government must do everything to lure the investors.
However, there is a genuine concern that what constrains the government from giving out any benefit to the middle class when doles are given to corporations?
There has been no revision in the tax rate in the old tax regime, section 80C benefits have remained at the same level for the last 10 years and people know that the new tax regime is like an eyewash.
The short-term capital gain tax rate has been raised and the indexation benefit has been withdrawn on LTCG which will further hurt the middle class (later FM issued a clarification on grandfathering the indexation for the period up to March 2001 and we will have to wait for the final bill passed by the parliament).
Even a sports body like the BCCI which makes thousands of crores every year does not pay any tax (BCCI is still contesting the tax demand and the matter is sub-judice), while similar organisations (like European football clubs) pay taxes. When the government can offer concessions and benefits to all and sundry then why is the middle class the only one who is left high and dry?
In a nutshell, the budget proposals are good for macroeconomic stability and will push growth but it fails to address the concerns of the struggling middle class.