Union Budget: A few drawbacks

These positives were primarily focused on the NDA government’s desire to prop up India’s rural economy, especially the agricultural sector. Today’s column will take a look at some of its drawbacks. The government has received a lot of flak on its proposed amnesty scheme for people who hold black money in the country and rightly so. “I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30 percent, and surcharge at 7.5 percent and penalty at 7.5 percent, which is a total of 45 percent of the undisclosed income,” Jaitley said in his Budget presentation speech. Such a proposal could essentially mean that those who declare black money within this compliance window will not be subject to any sort of prosecution by the government, besides getting a free pass from an enquiry under the Income Tax Act and Wealth Tax Act. The Centre’s amnesty scheme distorts the average citizen’s incentive to file their income tax return in an honest and transparent manner. “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully,” Jaitley had once said. Suffice to say, a black money amnesty scheme on these lines could lead to greater inequity. 

Besides a distortion to incentives, there is a legal angle to the matter that our Finance Minister seems to have forgotten. A similar amnesty scheme was launched in 1997 when P Chidambaram was the Finance Minister. Under its amnesty scheme, Rs 33,000 crore of undisclosed income was declared, on which the government had collected Rs 10,000 crore in tax.  As per records available in the public domain, it is clear that there was outrage at what many perceived to be attempts at “legitimising” money laundering. It soon led to a case in the Supreme Court. Up against such scathing criticism of the policy, P Chidambaram and then Union government had to commit to the court that there would not be any more tax amnesty schemes. How Finance Minister Jaitley will overcome these legal obstacles is best left to the government to answer. The recent Economic Survey, which was tabled before the Parliament last week, was unequivocal in its suggestion that it was important for the government to increase the number of Indians who pay tax. “Controlling for the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 percent of citizens who vote pay taxes, the percentage should be about 23,” the Survey said. It went on to further point out that approximately 85 percent of the country is outside the tax net. In addition to hampering the government’s ability to raise revenue, such volumes of unpaid tax only point to the massive amount of black money present in our financial system. Amnesty schemes proposed by the current dispensation could further incentivise tax dodgers not to disclose their incomes in an honest and transparent manner.  

Prior to the Finance Minister’s presentation of the Budget, many had raised questions about how much the government would allocate to its NPA-burdened banks. Data collated on 39 listed banks showed that NPAs (non-performing assets) surged to Rs 4.38 trillion for the December 2015 quarter from Rs 3.4 trillion in September. Considering the crisis that has swamped our public sector banks, it was to the disappointment of many that the Centre allocated only Rs 25,000 crore for recapitalisation. “Suffice to say, the amount may not even be enough to compensate for the quarterly losses of these state-owned banks,” according to a Business Standard report. “If history is any guide, the amount budgeted will be wiped off by even the quarterly losses of PSU banks.” The report goes onto speculate that the massive disparity between what Jaitley has set aside against the enormous clean-up required could be a case of the Centre looking to the Reserve Bank of India to fund the banks. Nonetheless, the amount set aside by the Centre is deeply inadequate with no clear directives as to what purpose such an allocation serves. But solutions to the banking crisis go beyond mere recapitalisation. Crony capitalism has been probably the biggest contributor to the current credit crisis in our banking industry. Although the RBI and the NDA government have reportedly been on top of this crisis for some time, little has been done until now. The government must go after errant defaulters while kick-starting the lending process by instituting some structural changes to our public sector banks that have been outlined in its “Indradhanush” scheme.

On the social sector front, primarily food security and education, the Budget seems to have been off the mark. “We need to think beyond food security and give back to our farmers a sense of income security,” Jaitley said in his Budget presentation. But in thinking beyond food security, the government should scuttle food security schemes. The total food subsidy in this year’s Budget is Rs 1,34,834 crore, which is approximately Rs 4,500 crore less than the revised estimates for 2015. Earlier this month, the apex court had expressed strong disappointment over the non-implementation of the National Food Security Act in certain States. A more pertinent point of observation is the inability of certain State governments to ensure food security for its people, despite the nationwide drought. On education, the problem is a little more nuanced. “After the universalisation of primary education throughout the country, we want to take the next big step forward by focusing on quality of education,” Jaitley said in his Budget speech. This is a patently false claim. Despite the enactment of the Right to Education Act, universal primary education has not been achieved even if one were to measure it in terms of enrolment. More than 30 percent of children enrolled in school drop out before Class 8. Of those who make it to high school, nearly 50 percent fail to move to the next level, according to a recent news report. Although the emphasis on quality school education is welcome, the system remains dogged by the poor state of basic infrastructure and inadequate levels of enrolment. Therefore, a mere increase of Rs 1,367 crore in the total allocation for school education seems terribly inadequate. Without a significant enhancement in investments for school education, the government’s claims of transforming education and its skill development initiative will come to nothing. In fact, since the current government took office, there has been a fall in the ratio of government expenditure to GDP under Integrated Child Development Services and other social sector related schemes. The Budget has not done much to address these concerns.