First and foremost, there have been calls from many quarters that in view of the slowdown in growth, India should allow fiscal deficit to rise 1 percentage point or more. This is imprudent advice. Fiscal consolidation has been a major accomplishment of the present government. Moreover, it is not as if we have a surplus or even balanced budget currently.
Quite the contrary, once we add up fiscal deficits of the Centre and states and off budget borrowing, public sector deficit turns out to be as high as 8% of GDP. This figure comes close to financial savings of households. Raising fiscal deficit further will not only undo a major accomplishment of the Modi government, it will also end up dipping into corporate savings depriving the economy of sufficient private investment. So my first recommendation is that the FM must hold the line on fiscal deficit.
Next, it is time to re-examine the inflation target. For a fast-growing economy, the target of 4% plus-minus 2%, which the Monetary Policy Committee (MPC) views as 4% or less, leaves too little room for relative prices to adjust in view of greater rigidity of nominal prices in the downward rather than upward direction. Even during 2003-04 to 2011-12, when the economy grew the fastest, inflation was 2 to 3 percentage points higher than during the first five years of the Modi government. A 2% higher inflation than currently will also help boost tax revenues on the one hand and lower the real lending rates on the other.
The FM has already taken the bold step of cutting the corporate profit tax rate (excluding cess and surcharges) to 15% for new manufacturing companies and 22% for all other companies provided the companies forego all exemptions available. A similar reform must also be delivered now for personal income tax. Budget 2020-21 must commit to cutting the top personal income tax rate to 22% (excluding surcharges and cess) within three years for those opting to forgo all exemptions. It should deliver a 3% cut upfront while committing to 2.5% cuts in each of the following two years. Approximately similar rollback should also be applied to the middle tax bracket.
Ending the exemption raj will go a long way towards improving efficiency of the tax system and attacking corruption in tax collection. In the long run, any revenue loss due to cuts in the tax rates will be made up by reduced evasion and improved growth outcomes. In the short run, the losses will be made up through other measures recommended in this article.
Now that the implementation process for privatisation of public sector enterprises is in place and more than two dozen PSEs have the approval of the Cabinet, the government must launch a major privatisation programme in the year 2020-21. There is simply no rationale for the government to operate commercial enterprises that serve no public purpose. The government must also monetise on a larger scale assets such as roads, airports, seaports and transmission grids through the instrumentality of toll-operate-transfer or TOT model. Both privatisation and asset monetisation will enhance efficiency while also bringing the government much needed revenues.
The government can no longer continue business as usual as far as public sector banks (PSBs) are concerned. As we come out of the NPA crisis, we must address the issue of their governance head on. Though numerous committee reports exist, this discussion requires urgent renewal through the appointment of an expert committee that must report back within three months. The terms of reference of this committee should include consideration of privatisation of at least a subset of PSBs as a solution to the governance of PSBs.
To address jobs and growth concerns directly, the budget speech must carry a special section on measures relating to labour intensive sectors such as apparel, footwear, furniture, kitchenware and numerous other light manufactures. There should be a clear commitment to reimbursing all indirect taxes paid along the value chain by exporters in these sectors, as permitted by the World Trade Organization rules. Unnecessary permissions exporters require from different ministries must be ended. Movement of goods into and out of India at ports must be speeded up.
Labour and land laws remain major bottlenecks. I have argued in the past that without the emergence of many more medium and large firms in labour intensive sectors, which requires land and labour law reforms, we cannot address the problem of creating good jobs for those with limited or no skills. And without such job creation, we cannot provide a pathway to a good life to the vast majority of 44% of our workforce employed in agriculture and another 42% in enterprises of less than 20 workers.
While politics holds back genuine countrywide reforms, the government may at least begin experimenting with liberal land and labour law regimes within two or three Special Employment Zones. The cost of such an experiment is minimal and should it succeed, potential benefits would be plentiful.