Nearly 120 million people have some sort of work under MGNREGA in 2020-21. This is 53% higher than a year earlier. In the last six months, the demand for work is highest ever at subsistence level, that too is only 100 days of wages. While millions are losing jobs, it is a wonder that the stock market is reaching record heights. The top 50 companies have gained nearly Rs. 3 Lakh Crores. It seems the increased liquidity of the banks is pushing the capital markets and benefiting a few. If the buoyancy in these sectors percolates to the rest of the economy, then the overall growth of the economy will be meaningful. Else, we need to question the “motive for economic growth”. The highly skewed income distribution pattern may have widened the economic disparity between the rich and the poor in most regions and states. Is economic growth being a “V” shaped quick revival one or a “K” shaped one articulating a clear divide between richer and poorer sections of the country.
The lowering of interest rates to increase lending and private investment has failed to pick up owing to structural stagnation and industrial stasis. So, the boom in the capital market and supply bottlenecks has, contrary to expectations, mainly increased consumer price inflation. The labour-intensive exports which surged our exports slowed down.
The inward looking “Make in India” policy has stifled the focus from export promotion to import restriction and import substitution. While over time, this will help reduce our current account deficit and trade imbalances, the way forward, will inevitably be on shifting the focus to integrated rural development. This was discussed in detail in Part I. However, the need for financial penetration and induction of private capital will be the only meaningful step towards Indian economic revival.
Capital has no political identity. It is merely one of the resources of production. So, the privatization thrust will ensure better business practices and greater quality of product. For example, the caps on expenditure that public sector medical insurance companies stipulate to the insured individual come under heads like “room rent”, “ICU charges”, or “surgeon expenses” as well as under, domiciliary treatment. Such insurance covers are seldom stipulated in private medical insurance policies. So, it might be in the interest of the consumer to seek more efficient and better insurance coverage from private insurance companies. It is feared that the private and foreign capital in the insurance sector will lead to a siphoning off profits to other countries. But in the first place there must be profits to be siphoned off. Moreover, why should profit making units not expand its business operation in the host country? To induce foreign capital is one part of the effort; to encourage its reinvestment is governance; and transparent state fiscal policy, will retain investments in the host country. Vietnam, Singapore, Thailand and China have grown in a dramatic manner using FDI and foreign investment. This reiterates a very strong role played by foreign private capital and investment. Even for rural development contract farming and penetration of private capital is necessary. We need to strengthen cooperative farming to ensure viability and vibrancy in these units.
ITC is an example of how a corporate house can sustain vibrant growth through rural development strategy. NITI Aayog has been asked to prepare a list of PSUs to be divested and to complete the disinvestment of BPCL, Air India, IDBI, BEML, Shipping corporation, CONCOR. It is to comment on a mechanism for timely closure of sick PSUs. These are steps in the right direction. This Union budget has been forthright in its indigenous thrust to uplift a severely contracted economy. The prescription is simple‒ perform or perish!
COVID necessitated amendment to FRBM Act. The fiscal deficit is targeted to fall below 4.5% to GDP by FY26. The plan is to move ahead on the path of fiscal consolidation; to augment contingency funds to 300 billion rupees and to cap borrowings by state at 4% of GSDP in FY22. The pandemic resulted in weak revenue flow, so food subsidies are to be financed by budget. However, the states’ fiscal deficit is now reset to reach 3% of their GDP by FY24. The finance panel has recommended 41% tax devolution to states, which is 1% lower than before owing to devolution of funds in Jammu and Kashmir.
Both savings in fixed deposit and investments above a certain limit in capital markets will henceforth be taxed. The emphasis now is to encourage spend and consumption more than savings and thrift as it was done by a few decades earlier. Some salient changes have been brought in which were not there before increasing the tax burden for many. To mention some of these proposals:
- Union budget 2021 has proposed not to provide tax exemption under section 10 (10 D) of Income Tax Act for maturity proceeds of unit linked insurance policies (ULIPs) with annual premium above Rs.2.5 Lakh at par with equity linked mutual fund schemes.
- To restrict tax exemption for interest income earned from employees’ contribution to provident fund to an annual contribution of Rs.2.5 Lakh. Any interest on employee contribution to provident fund above this is now taxable after April this year.
- Long term capital gains (LTCG) arising out of sale of listed equity shares and equity oriented mutual fund schemes are now taxed at 10% if the gains exceed Rs.1 Lakh (gains up to January 31, 2018 being grandfathered. As it is, if the units are sold before one-year, short term gains are taxed at the rate of 15%.
- Senior Citizens of 75 years and having pension and interest from fixed deposits would not be required to file income tax returns for the next financial year. This could have been extended to citizens of 65 years as they have to submit returns from any other source. This, by the way, is not such a relief after all. The 26AS form takes account of most sources of income through TDS (Tax deducted at source). It does however, makes it easier for senior citizens from the difficulty of submitting income tax returns. A point to be noted is, if there are deductions more than entitlements for the seniors, the need to submit income tax returns to seek refunds will remain. Senior Citizens should have been given a relief of not having to pay GST on medical insurance premium. That would be a minimum social security benefit to those who contributed to the economy for more than decades.
- The additional deduction of Rs.1.5 Lakh on interest paid on housing loans for buyers of affordable homes (up to 45 Lakhs) has been extended for another year. This will provide an opportunity to realtors and real estate sectors.
- Union Budget 2021 has proposed a new section 206AB in the income tax act as a provision providing for a higher rate of TDS for the non-filers of income tax returns. This rate will be twice the rate in force (the rate of the five per cent).
On indirect taxes a flipside of union budget figures, the analysis will follow in Part III