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Tuesday, May 30, 2023

Good budget with some misses: securities lawyer and author Sandeep Parekh

It was a good budget but with some misses. I did a thread last year raving about the 2021 one. This thread is different. We are on the right path, but budgets should be transformative.

Let’s start with the biggest picture. It’s clear that the government is not just sitting on huge sums of money, but the incremental tax receipts are not showing any signs of flagging.

It either needs to spend the excess money to buoy the economy or needs to reduce taxes, so that companies and individuals can spend that money and do the same. We do know that governments are not very good at spending money on its corporate arms.

Almost all public sector undertakings are just terrible at productivity. Some are massive black holes of tax payer cash (think 1.5 lakh crore rupees spent just on Air India). Also look at the valuations of public sector companies on the markets.

Secondly, public sector units crowd out entrepreneurship (how do you beat a peer who doesn’t care about losses for decades), corners land (think of thousands of acres of unused land in any large city), consume capital pointlessly and spoils the least productive workers while grossly underpaying the most valuable ones (MDs at public sector units can make 1/100th the compensation of their peers of equal size).

Setting aside the recent woes of the pandemic (which should, god willing be history) and need to push consumption, Bharat’s growth will really come from increased productivity of land, labour, capital and entrepreneurship.

The government can of course spend on public goods (and it must) – central subject like roads, railways, ports, airports and centre assisted state spending are key capital expenses. It can also spend on urbanisation, potable water and many things which are really state subjects.

Here is the catch, as @neelkanthmishra points out, while budget outlays are good and public spending is great in these times of needing to push up economic activity, there is very little ability to spend.

Roads can be built, but most other areas can’t really ramp up spending the way the budget has outlined. Money is going to lie un-utilised.

A much lower hanging fruit, which was not picked this year, was reducing individual taxation. In fact, there is no reason to have different taxation rates for companies versus human beings.

As a nation, if we have chosen low corporate tax for making our economy competitive, we should have the same regime for individuals.

With the fiscal and monetary space available this year, it was a great time to equalise the two and truly unleash the animal forces of entrepreneurship, not just the shark tank types, but also of the neighbouring kirana stores.

Even more burdened are Bharat’s salary class, which likely pay well above their billionaire peers in percentage terms.

This would also have pushed the formalisation of the economy beyond indirect taxation. And with such an attractive tax regime for companies (which starts at as low as 15% tax), there is no justification for the same business to be taxed at 40% if the corporate shell is taken out.

Incentivising a desirable business through tax is understandable, but merely because a person is wearing a corporate carapace given such person lower taxation in wrong classification.

Everyone always gripe about tax not being rationalised. But I think the biggest miss really is not tax rationalisation. It’s the public sector privatisation.

Both disinvestment and privatisation could have a super massive impact on the productivity of the nation. Having a totally unambitious target in the budget was indeed disappointing.

A true privatisation, though I do underestimate the political will required to do so, could improve productivity for the next several decades.

We could be looking at significant availability of new lands in cities (from public sector), labour reforms (yet to be notified), capital available for use in more productive uses (less crowding by useless companies) and enterprise (can now compete).

Yes, disinvestment and even more importantly privatisation can be done, should be done, must be done to really unleash Bharat which was chained in July 1969. What better time to unleash Bharat in the year Air India flew from captivity, finally.

(This article has been compiled from the tweet thread of Sandeep Parekh)

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