Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pre-Budget Pangs Are In Order - Outside View by S.S. TARAPORE
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Pre-Budget Pangs Are In Order
Feb 23, 2015

If one is to give serious consideration to the views of large industry, economists and opinion makers, the common person has much to fear from the Union Budget for 2015-16, which is to be presented by Finance Minister Arun Jaitley on February 28, 2015. Under the Fiscal Responsibility and Budget Management Act (FRBM), the gross fiscal deficit (GFD) is to be reduced to 3.6 per cent of GDP in 2015-16 and 3.0 per cent in 2016-17. As it is the glide path has, over the years, experienced deviations and postponement of targets. Powerful segments of society and a number of eminent economists have formed cheer squads on the sidelines, urging the government to replace dogma with pragmatism on fiscal and inflation targets. These lobbies claim that the government should do whatever it takes to get the economy going. Sage economist Shankar Acharya rightly argues that while there is a case for increase in infrastructure expenditure, this should be accommodated within the envelope of fiscal prudence.

Favourable treatment for upper income groups

Translating the thoughts of the fiscal expansionists into concrete measures, it is recommended that the government should kick-start the economy with a larger GFD and above all, not put any tax burden on industry. It also implies that higher income groups should be provided more favourable income tax slabs i.e. the maximum tax rate should apply to incomes over Rs 20 lakh per annum, as against the present Rs 10 lakh. Of course, these powerful lobbies would not countenance any talk of an inheritance tax, gift tax (without exemptions for gifts to relatives), a capital gains tax on STOCK MARKET transactions or a tightening of the wealth tax regime.

Taxing of dividends

Needless to say, the powerful lobbies would not want the dividend distribution tax (DDT) to be abolished and the status quo ante restored, under which individuals receiving dividends would be taxed. Of course, these advocates would like the DDT to be abolished and also, individuals receiving dividends should not be taxed. The last time a finance minister (Yashwant Sinha) reintroduced the tax on dividends received in the hands of individuals, he was shifted to the ministry of external affairs.

Unlimited exemption of dividends from income tax is a fiscal atrocity and is not reflective of distributive justice. If dividends are to be exempt from payment of tax by the recipient, there should be an appropriate limit for such an exemption. Ideally, all dividends received in the hands of individuals should be taxed at the maximum tax rate and tax credits given to individuals. The lower income groups will receive refunds, while the upper income groups would not receive any refunds. If this is not acceptable, at least the DDT should be raised by five percentage points.

Raising basic exemption limit for income tax

Taxpayers in the lowest tax slab deserve some relief and in this context, the basic income tax exemption limit could be raised. This will lighten the tax administration burden. This revenue loss can be recouped by either a slight increase in the tax at the maximum slab or alternative taxes, say on inheritance, gifts to relatives and wealth tax could be imposed. Privileged segments of society would see to it that there is no increase in taxes for them.

Concern over falling savings

Since the ratio of gross domestic savings as a percentage of GDP has fallen in recent years, from 36 per cent to 30 per cent, some urgent action is necessary. The government provides extremely high effective rates of return under Section 80C. The government should provide at least one instrument for long term savings without any tax concession. Furthermore, the mandatory savings in Provident Funds could be raised. This is appropriate, as many countries have much higher mandatory savings.

To foster savings it is necessary to slow down some segments of consumption. The minimum down payments need to be raised steeply, which would discourage hire purchase schemes and thereby result in a substantial increase in net savings.

Curbs on government expenditure

The Bimal Jalan Expenditure Commission would, it is hoped, make recommendations which would result in substantial reduction in government expenditure. There are some subsidies which can easily be reduced. A glaring illustration is the subsidy on LPG which is available to all consumers. Asking individuals to voluntarily give up this subsidy is not workable. A simple means test could be used to curtail this subsidy. For instance, all income tax payers and their families could be ineligible for this subsidy.

Government and Public Sector Units (PSUs) have become soft and there is a quantum jump in their conspicuous consumption. This is because of a demonstration effect from private sector corporate, which provide for obscene incomes for their honchos. Any attempt to control these incomes would result in an uproar, but if this is not done, it would be difficult to curb non-priority government expenditures.

It is essential to ensure that while cuts in government expenditure are undertaken, the vulnerable social sectors, such as health, education and women and children welfare measures are not curtailed.

Note: This article was first published in The Freepress Journal on February 23, 2015. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Pre-Budget Pangs Are In Order". Click here!


More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

Venezuela's Own Crypto Currency: Smart or a Sham? (Outside View)

Feb 21, 2018

The South American nation of Venezuela just launched its own cryptocurrency. Is this the beginning of a revolution? Read on to find out more...

Safe Stock Ideas for You from Monday to Friday (The 5 Minute Wrapup)

Feb 21, 2018

The 5 Minute WrapUp will now come to you every weekday.

Narrow Banking: Public Sector Banks Should Not Be Lending to Corporates (Vivek Kaul's Diary)

Feb 21, 2018

Corporate bad loans constituted nearly 70% of the total bad loans of public sector banks in India, in 2016-2017.

More Views on News

Most Popular

Follow India's Super Investors to Make Big Money in the Market Crash(The 5 Minute Wrapup)

Feb 8, 2018

Has the sell-off in the markets left India's super investors unduly worried?

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

The Markets Want Your Money. Don't Give It to Them.(Smart Contrarian)

Feb 9, 2018

MFs are having a gala time taking money from over-eager investors and funneling it into equities. Smart investors, though, know better than to do that.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

Rising Dominance of Mutual Funds(Chart Of The Day)

Feb 8, 2018

Domestic money flow into Indian equities surpassed foreign fund flows in the recent years. But will it continue in volatile market?


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 21, 2018 (Close)