Budget a statement on the economic philosophy of the government

Picture Courtesy - Sharda Industries, Pune

The union budget is just a routine accounting exercise now. Nothing much to get excited about.’ So goes the popular opinion. And that would be so if tax proposals were not a part of it, besides other policy or roadmap announcements.

The budget in that sense represents a declaration of the economic philosophy of the government. A statement of purpose by the government.

So will this budget be an extension of the past? An exercise in incrementalism? Or will it make a clean break from the past (at least on a few counts) to chart our a new path for a newer future?

For a large country like India with currently the largest young population, an excessively large percentage of the population (42.5%) is dependent on agriculture (just 18.2% of our GDP) and the desperate need to catch up on manufacturing growth to create more jobs and give strategic strength to our economy and nation (and for many other social reasons), the need to free and enable its enterprise to flourish has never been more acute.

Economic Survey says that the Indian agriculture sector provides livelihood support to about 42.3 percent of the population and has a share of 18.2 percent in the country’s GDP at current prices. — Economic Survey, July 2024

A few years ago I argued in an article on why the government must do away with income tax for small and medium enterprises up to 500 crores. A number of good initiatives have followed since then, a lower income tax rate, loan guarantees, lower TDS rates for some sectors, an SME quota in government purchases, and so on.

These are however incremental though they do add up well. No matter who I talk to amongst friends and partners running small enterprises, I get to know of pending tax disputes that have dragged on for years 15+ years in some cases. This is such an utter waste.

As per recent media reports, the direct tax appeals pending at various forums (ITAT to SC) rose from 51,567 cases involving disputed amount of Rs.6.64 lakh crores in FY 2021–22 to 64,311 involving disputed amount of Rs.14.21 lakh crores (i.e. more than double) in FY 2023–24. This is over and above 5.8 lakh cases pending before Commissioner (Appeals)/Joint Commissioner (Appeals). — Financial Express.

Not only must the government write off these demands quickly but must move to a zero tax for SMEs up to 500 crores.

This move alone can bring in a lot of capital for the SMEs to grow and become world-class.

The government may leave out certain sectors it feels do not add enough value and may put other more value-adding conditions like quality certifications etc. as the qualifying criteria.

This however needs a change in the mindset of the government, which must see the SMEs as economic and social assets that need to be preserved, nurtured, and grown. The SMEs represent immense in terms of the capabilities gained over years of doing-correcting-doing that must be unlocked.

SMEs have an enormous potential to bring social stability, create jobs, and spread skills and knowledge in society.

I hope this budget shows a clear intent in this direction. Will it?

Will it instead prefer to put more money in the hands of consumers to kick up the growth numbers?

Will it instead put its mind to sorting out the finances for the cities and towns, which currently account for just about 1.3% of the GDP, to fix urban economic engines?

The total expenditure by MCs, encompassing both revenue and capital spending, increased from 1.2 percent of GDP in 2019–20 to 1.3 percent in 2023–24.

Or will incrementalism prevail?