Mains Paper 3: Economy
Prelims level: Tax Structure
Mains level: India’s economic growth and development
• In the current financial year, extra-budgetary spending was Rs 1.4 trillion higher than what had been budgeted.
• Ninety per cent of that amount was from the Food Corporation of India.
• While higher inventory holding likely explains a large part of this Rs 1.2 trillion increase, one wonders if some unfunded food subsidy may have contributed too.
• Governments also have this tendency to give aggressive tax collection targets that make the deficit appear low, but then later in the year are forced to make course corrections.
Are the tax targets for the next year too aggressive?
• The economic growth estimate of 11.5 per cent, taking the GDP to Rs 210 trillion, may be slightly optimistic, given how weak inflation has been in the past several months, even if the government’s consumption stimulus shores up activity levels.
• Budgeted growth in direct tax collections at 15 per cent appears high, but is lower than what has been achieved over the past two years and thus more credible, given the significant widening of the tax base, and some recovery in corporate earnings.
• The 18 per cent estimated growth for GST collections seems to assume an improvement in compliance.
• As government functionaries have frequently stated in the last few quarters, GST collections thus far have been nearly completely voluntary.
• The highlight of the budget was the Rs 750 billion income transfer scheme for farmers.
• Even though this was widely anticipated, this is a policy innovation whose impact is hard to model.
• Most income transfer schemes so far have been experiments on small sets of people in particular villages or townships.
• The impact of a scheme with 117 million farmland owners is likely to be significantly different.
Will it be inflationary?
• Theoretically, a sudden rise in demand where supply takes time to respond should create inflation.
• If for argument’s sake, everyone used these funds to send children to private schools, there could be a shortage of schools and teachers and the price of schooling would rise.
• But this risk is low: At about a third of a per cent point of GDP, this is small.
• The diffused nature of this transfer (a small sum to a large number of people), makes it unlikely to cause a demand surge for any particular good or service. Rs 6,000 per year may mean a 30 per cent addition to some households’ income, and 5 per cent to others: This would show up in how they spend these funds as well.
• Such a scheme would have most likely boosted food demand: This is nearly 60 per cent of the consumption basket of the target population.
• If you have ever asked how a country with one of the lowest milk consumption per capita can have an oversupply of milk for several years, the answer is that milk at current prices is unaffordable to many. If the demand for milk, meat, fruits and vegetables, that is, more expensive calories, was boosted, the stalled channel of income transfer from the rich to the poor, which is food prices, would have restarted.
• This stimulus should boost growth, which has been fading rapidly in the last several months.
• Most indicators of economic activity had been showing a steady slowdown in the last several months.
• There were some measures in the budget to support the real-estate market as well as developers, but we believe that the challenges of the non-banking finance sector are likely to overwhelm any positive impact of the fiscal measures announced.
• An income transfer scheme was somewhat inevitable, and such a scheme will likely continue for many years.
• After a certain stage of economic development, it becomes difficult for average per capita agricultural incomes to keep pace with the rest of the economy, as land productivity becomes a limiting factor.
• Moving workers away from agriculture is the only sustainable solution: In the interim, such schemes can provide temporary relief. But given how little we understand about its potential impact, policy-makers need to be agile in making design changes to maximise the gains without having damaging side-effects.
Q.1) Consider the following statements regarding Marginal Cost of funds based Lending Rate (MCLR)
1. The new MCLR replaces Base Rate System
2. MCLR aims to improve the transmission of policy rates into the lending rates of banks.
3. MCLR will bring transparency in the methodology followed by banks for determining interest rates on advances.
Select the correct code
a) 1 and 2
b) 2 and 3
c) 1 and 3
d) 1, 2 and 3
Q.1) The income transfer scheme was the highlight of the budget. But its success will need deft maneuvering. Comment.