Pundits, both the media-anointed and the twice-born kind, have been writing about budget expectations since there have been budgets. There are three lines which articles like these actually follow. One, they could be a realistic assessment of what could expected. Two, they could be blue sky wish-list, a sort of a letter to Santa Claus, which is basically intended to show readers what all the budget won’t be doing. Or three, it could be about things that the government should do, things that are actually feasible and needed but which may or may not be done.
I think I’ll take the middle path, (if it’s possible to do that with three alternatives).
It almost goes without saying that the expectations from this budget are much sharper than they have been for many years. There was a time, from Manmohan Singh’s first budget in 1991 till the late 90s, when the budgets were invariably landmark events that were giving form to India’s economic landscape. Once that series of history-shaping budgets was over, we’ve had a series of low-impact budgets which basically tinkered without making any big changes.
This time it’s different, and there are great expectations in the air. Rightly or wrongly, the election results have created an atmosphere where the whole country is waiting with bated breath for everything that the government is about to do, and let me tell you that this is going to take a lot more than getting rid of class ten exams or giving the whole country an I-card.
The other day, while discussing how the stock markets will react to the budget, I heard someone say that if the markets rise too much before the budget, then they’ll fall when the budget is presented. I think heightened expectations are the biggest issues as we head into this budget.
In the realm of savings and investments, there’s a great deal that the finance minister can do. I believe one of the most significant changes that is needed is to put the New Pension Scheme (NPS) on an equal footing with other savings vehicles. Even though the law that will finalise the NPS’ status is not yet passed, the system has been launched. It’s very early days yet but I’m sure that eventually, the NPS will evolve into a shape whereby it will be the bedrock on which most Indian’s savings is based on.
However, as things stand, the NPS has a huge tax anomaly built into it. The returns that the NPS will generate for its members will be taxed. The NPS is based on what is called EET (exempt-exempt-taxed) model of taxation. The invested amount and the reinvested returns are tax free, but the final withdrawal is taxed. Some years ago, the Kelkar Committee on Direct Taxation recommended that all EEE options like PF and PPF be also moved to EET. The NPS is actually supposed to be the first move into this brave new EET world. Unfortunately, everyone knows that the political will to make PF and PPF withdrawals taxable doesn’t exist and is unlikely to come into existence in the foreseeable future. Which boils down to rendering the NPS a non-starter from the taxation angle. In this budget, the government should do the right thing and give the NPS the same status as other systems, whatever that may be.
One of the more widely expected changes in the savings and taxation realm is the raising of the Rs 1 lakh limit on tax-exempt investments, the ones that collectively come under Section 80CC of the tax law. I don’t know whether this is actually on the cards or whether it’s basically a red herring that has survived since it was first brought up in the BJP’s election manifesto.
However, the real reform that is needed is to link this (and other tax-level limits) to an inflation index. Rs 1 lakh is worth a great deal less since the time it was set as the tax-exempt limit. Most middle-class Indians’ long-term savings are entirely driven by this tax-exempt limit and to keep it fixed at a given level for years on end means that the real savings go down.
However, I guess that this inflation-linkage comes under the category of one of those blue-sky things that won’t actually happen. When they do raise the tax-exempt limit, they would like it to be seen as largesse that they are bestowing and earn some political capital out of it. No finance minister will ever make a change that builds in an automatic revenue reduction into the income tax system without getting the credit for it.
However, revenue reduction brings us to the most uncomfortable fact about the coming budget. Every single budget expectation that anyone has heard or read boils down to the government either taxing less or spending more. Is this likely to happen? The way things are, don’t bet on any of it. Especially, if the rains don’t show up before 6th July.
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