As we sit down to pen our thoughts on the eve of Budget 2020, we feel that this is going be an important budget for the country in light of the fact that the economy is in the grip of a severe slowdown and many market observers are looking to the budget for direction. So we asked ourselves – what would we like the Finance Minister to announce in the budget? We believe that there are two important areas that government policy needs to address to put the economy back on track.
The first deals with the taxation policy of the government. Over the last 6 years or so, the government has slowly upped the rates of direct taxation on the economy (except for the low income earners) along with an avowed policy of tackling corruption and black money. That is, until one fine day in September 2019 when the Finance Minister announced the bold corporate tax cut. We believe that the government should go further down this path and make equally bold changes on the personal income tax front to induce greater compliance. The policy of ‘stick’ for the corrupt and the dishonest must be accompanied by the ‘carrot’ of low and stable tax rates in order to achieve the eventual objective of a higher proportion of people declaring their true income and be taxed at a reasonable rate for it. A strong reform agenda which included GST, RERA (for the real estate sector) and the Insolvency and Bankruptcy Code along with the quarterly review of banks by the RBI and the resultant NPA problem have brought the economy into the grip of a severe slowdown and the cut in personal income tax rates would provide the necessary fillip to growth in the economy. The government needs to put more money in the hands of consumers and investors so that they may in turn get the wheels of the economy moving smoothly again.
Our second piece of advice for the government is to work in an urgent fashion to pay all their vendors and suppliers for goods and services consumed by the government, as well as GST and other tax refunds. Our conversations with corporate leaders suggest that this is currently a major pain point in the economy. The working capital cycle of many economy participants have seen a large increase because of dues pending from the government, creating conditions of tight liquidity in the economy. This also has a cascading effect as companies who are not being paid by the government, in turn delay payments to their suppliers. While the government has stressed on this in its conversations with the media, we look forward to more action on the ground.
Our above recommendations would come at a cost i.e. the foregone tax revenues from the move and its impact on the fiscal deficit. The clearing of government dues would also have an impact on the reported fiscal deficit numbers. We think that the bond market may be willing to ignore a temporarily higher fiscal deficit of the government, if the result is a more vibrant economy which will boost revenues over the medium term and result in lower fiscal deficits over the medium term. The current low trajectory of economic growth would anyway put pressure on fiscal targets. It may be better to try and grow yourself out of the problem.
With weak economic conditions lasting more than 5 quarters and the industry facing a severe cash crunch, this budget should be a good stage to kick start an economic revival. We look forward to the Finance Minister addressing these issues and more.