As the Narendra Modi-led BJP Government is getting set to present its maiden budget next month, expectations are, understandably, running high. One the one hand, every constituency will be hoping the Modi Government to shower some concessions or the other on it.
On the other, every economist will be wishing the BJP Government to plug the gaping hole in its cash box. The task is, however, easier said than done.
There a quite a number of challenges staring at the new government right now. How to put the economy on to an acceleration mode? How to do it without inviting price spiral?
An influential section has been pleading for putting more money into the pockets of common men. Some have countered this saying that this will further fuel inflation, which has already seen a huge hole in their pockets.
Not surprisingly, the reported move to raise the income tax limit to Rs.5 lakh from the current Rs.2 lakh has elicited extreme reactions. Casting aside the merits and demerits of such a move, it can be safely argued that inflation has indeed hurt every Indian who earns the money hard way. Inflation-caused erosion in their income needs to be compensated.
It is indeed a fair argument. But how could the government compensate the revenue loss if it lowers income tax rates?
Given the complexity of the Indian politics, many segments are still functioning outside the organised economic system for assorted reasons. Perhaps, this is the reason why certain well-meaning policy actions of the Reserve Bank of India aren’t exactly been able to see the desired, rather intended, effect on the economy.
Often times, top officials of the RBI have suggested the need to move away from cash and into cashless system. The reason is not lost on discerning students of economics.
As the fiscal and monetary managers are battling to bring everybody into the organised stream, the best course open in the interim is to use indirect means to bring them on board. Precisely this in view, many have suggested lowering the tax and widening the base.
The exclusion of certain segments from the organised stream due to extreme politicisation of caste, creed and community in the Indian context has to be dealt with innovatively by the economy managers. The best tool available for the fiscal managers is to use the indirect tax as an ingenious way to bring even those who skirt the system on board.
Indirect tax by definition is regressive. How to remove this tag from it, and make indirect tax a secular one? It calls for a “least taxation’’ system.
Will the Modi Government take the bull by its horns? That is the moot question, though.