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Will the finance minister give goodies to all?

Will finance minister Arun Jaitley go for cash handouts to farmers or dole out tax sops for the middle class, or will he stick to fiscal discipline. Either way, with general elections just five months away, finance minister Jaitley faces a tightrope walk

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Arun Jaitley
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A few months ahead of the Lok Sabha elections, the central government is in a dilemma. The rout in the three state elections in December has set the ball rolling. Everyone is keen to know if the government will commit more funds on the farm sector to win back the rural support. The big question is that would the government go for any big-bang announcements to appease the middle class in the run-up to the elections?

As finance minister Arun Jaitley gets ready for an interim Budget or vote-on-account on February 1, is there scope for the government to announce some ‘populist’ measures before the Budget?

The corridors of power are abuzz with rumours that the government may be looking at options including direct income-support scheme for farmers, cash handouts based on the difference between the minimum support price (MSP) and the actual sale price, a finance ministry official said. The third option being considered is a crop insurance scheme, according to another official.

The government, however, is not in favour of farm loan waivers. Many states have already announced loan waivers. Prime Minister Narendra Modi has termed such loan waivers ‘lollipop’ and ‘poll stunt', effectively ruling out loan waivers by the Centre. The government, on the other hand, wants “structural changes in the farm sector so that the farmers don’t get into the debt trap in the first place”. 

In the current scenario with only a little time left for the general elections due in May, “the direct investment (income) support scheme looks more plausible. It may cost the government exchequer around Rs 2.8 lakh crore if the farmers are to be given Rs 4,000 per acre each in the two crop seasons,” says Siraj Hussain, former Union agriculture secretary and a fellow at Delhi-based research think-tank ICRIER.

With the country’s net sown area at about 140 million hectare and taking into account the double cropping that includes rabi and kharif seasons, the total net area for which the assistance would have to be provided will come to 280 million hectare. 

“Direct income support scheme on the lines of Telangana’s 'Rythu Bandhu' is better than the other options that are being talked about. It is easy to administer and understand. Given that the time is too short to implement any new scheme, there are not many options left before the government. It can’t come up with something which may be difficult to implement,” Hussain adds.

Telangana government gives every landowning farmer Rs 4,000 per acre per season to support the farm investment twice a year for rabi and kharif crops. This is the first direct farmer investment support scheme where the cash is paid directly. The scheme has no cap on the number of acres.

As far as the second option is concerned, which involves paying farmers the difference between the MSP and the price at which the crop is sold, "such a scheme can’t address the problem in the agricultural sector because different states need different kind of intervention. Punjab needs intervention which is different from Vidarbha or Telangana,” says Hussain.

The ‘Bhawantar Scheme’ offered by the Madhya Pradesh government takes care of the amount the farmer lost as a result of selling the crop below the MSP. "It has failed in MP as it is difficult to capture the price at which the farmers are selling their produce in the mandi or outside,” Hussain says.

The Centre is looking at further changes in the MSP system. In September 2018, it had announced an enhanced MSP.

Another option before the government to address the farm distress is the crop insurance scheme. Sources say that it may entail a flat premium of Re 1 to be paid by the farmer.

One more option before the government could be the Universal Basic Income (UBI), according to experts. The UBI, a social security scheme proposed by the Economic Survey 2016-17, if implemented, will see citizens receive a sum of around Rs 650 per month. It would cost about 5% of the GDP if 70% population is covered under it, as per the calculations done by the Survey. Depending upon the size of the population targeted under it, the cost of the scheme could be around 4-5 lakh crore per annum.

“UBI is for everyone, including farmers, urban poor and labourers. The cost will depend upon who all will be covered under it,” says Hussain, adding that the scheme is unlikely to be implemented as it is unviable.

Moreover, there is very little time left to implement such a massive programme. It could still form a part of the party manifesto, say experts.

Tax sops for the middle class

Though not much is expected, former finance minister Yashwant Sinha feels that the government could provide marginal relief to the middle class before elections. “Middle class could be given some tax concessions and relief on the income tax front. The government could even announce something before the Budget like it did for pensioners,” he says.

“It might be in the form of additional tax deductions to encourage people to invest in different instruments. Or it could also be something that would be shown as inflation adjustment to appease middle class,” feels EY’s chief policy advisor DK Srivastava.

Finance minister Jaitley recently made pension funds under the National Pension System (NPS) tax-free at the time of retirement to appease the government employees. "There won’t be anything much for the middle class in the Budget. At the most, the threshold limit for income tax exemption might be increased a little from Rs 2.5 lakh to Rs 2.6 lakh,” says Madan Sabnavis, chief economist at Care Ratings.

On the other hand, many experts feel that there wouldn’t be a departure from the past precedent of leaving the income tax rates unchanged in interim Budget. “As far as tax proposals are concerned, they can’t come in the interim budget," says Pronab Sen, former chief statistician of India.

"Traditionally, the upcoming Budget should not have any major tax changes in store since it is the prerogative of the upcoming government to announce any policy matters. However, the Modi government is known to do things differently and we won’t be surprised if certain tax changes are brought into the Budget. The strained middle class would expect easing of tax rates and we may see the FM going a bit populist and lowering the tax rates or tinkering with the slabs. At the same time, having increased the tax base significantly (almost double the number of taxpayers since 2014) it would be a difficult decision to increase the basic exemption limit. In my view, we will see some rationalisation of the slabs and tax rate, but keep the basic exemption limit constant,” says Maulik Doshi, partner and senior executive director at SKP Business Consulting.

GST relief for MSMEs

The GST Council is likely to consider raising the threshold for tax liability from Rs 20 lakh to Rs 75 lakh in order to provide relief to the Micro, Small and Medium Enterprises (MSMEs).. The decision on it could not be taken in the last meeting of the Council due to reservation of some states. Subsequently, the issue of revenue threshold for GST registration and the one concerning the tax rate on under-construction flats was referred to a panel for a review.

These proposals would now be placed before the Council in its next meeting. The GST Council may bring down the GST for construction-related material to 5% from a current 12%, thus reducing the rates for under-construction flats. The PM recently spoke about simplifying the GST and making it more people-friendly. 

According to Prasanth Agarwal, an indirect tax expert at PwC, “If the government goes for a single tax rate, it will have to keep the slab at 15-16% to maintain revenues at the pre-GST level.” This is line with the rate suggested by the former Chief Economic Advisor (CEA) Arvind Subramanian led committee on revenue neutral rate.

Fiscal deficit concerns

The central government is facing a tight fiscal situation given that it has already exceeded its fiscal deficit target of 3.3% of the gross domestic product (GDP). It is behind the schedule on the tax collection front due to weaker-than-expected GST collections so far. The government mopped up just about Rs 8.71 lakh crore till December against the budgeted target of Rs 13.48 lakh crore for the current fiscal. The likelihood of the government meeting the fiscal deficit target will also depend on whether it achieves the disinvestment target of Rs 80,000 crore for the current year. Disinvestment proceeds stood at Rs 34,000 crore in December. Meanwhile, any expenditure cut in an election year is also quite unlikely. 

So, where will the additional resources to fund these schemes come from?

According to Yashwant Sinha, “The government is trying to do that in a manner that it perhaps won’t reflect in the fiscal deficit. For that, it might dive into the Reserve Bank of India (RBI) reserves and get some amount transferred to the banks. Since it will be a transaction between RBI and the banks, it will achieve the purpose without breaching the fiscal deficit target.”

The RBI committee on capital framework led by former governor Bimal Jalan has to give its report by March end. It will decide what is the appropriate level of reserves that the regulator should hold and that how much of surplus funds could be transferred.

"But funding the sops with the RBI reserves won’t be easy. Many questions would be raised if it is used for this purpose instead of recapitalising banks," says EY’s Srivastava.

On the fiscal deficit side, some economists also feel that fiscal arithmetic is something which can be also be taken care of through accounting to meet the deficit target.

“If you are willing to breach the fiscal deficit target, there are numerous ways to do it,” quips former chief statistician Pronab Sen.

Sen, however, feels that the populist measures are not easy to implement. “If you have not built it in the current year’s Budget and have to go for the expenditure, you have to get the supplementary demand for grants cleared by Parliament,” he says. 

Every expenditure has to be cleared by Parliament. "And the amount of time left for that is very limited. Even if the government gets it passed in the winter session, it also needs time to implement it. It typically takes 4-6 months for a budget proposal to get a scheme implemented on the ground. Unless it is a complete giveaway like putting money in Jan Dhan accounts. That you can do easily. The government can, however, announce schemes which they can say will implement in the full budget if they are elected back to power. They can also increase the expenditure in the existing plans,” Sen says.

As far as the interim Budget or vote-on-account is concerned, “the government can make commitments for only about one sixth of the resources while projection on resources and expenditure is for the entire year,” said Anjuli Chib Duggal, former secretary of Department of Financial Services. The interim Budget typically involves expenditure for two months, she adds.

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