Challenges in front of Arun Jaitley’s successor as the Indian economy sees a slowdown in demand

The role of the finance minister in the new government is extremely challenging. The first challenge is immediate work – presentation of the central budget within a few months of taking charge. It involves making decisions about tax, expenditure and lending.

With this huge task, which is to be done in very short period as budget is to be presented in July, the Finance Minister is also expected to understand the long-term challenges facing the economy which are outside the budget mandate Are. . Departments and financial advisors and experts often give a side of the picture, and the solutions they are convinced about, and they represent different perspectives and stakeholders.

Budgeting

Understanding the trade-off included for different policy choices is essential to hear different views of the minister’s team and the other, to understand the possible normal balance effects for the economy and ultimately what to do. . This is a complex and involved work and in the first two months of the term, doing this makes it even more challenging.

The action taken by the Finance Minister for the success of government policies is important. While party leadership can give broad policy directions to the finance ministry, it is important to translate the role of the finance minister and team in a consistent direction for these proposals, plans, and economy.

time horizon

Since the government departments focus on trying to solve the problems faced by them, they miss the big picture. Civil servants are generally biased to solve their clock problems. Thus, an official with a horizon of one or two years can not give advice, which will help the economy in the five year period.

The minister is a five-year tenure and a longtime politician. The minister will have to think long term and with the government’s long-term policy framework, the stability of various proposals will be ensured. Nevertheless, he or she can not ignore the short term

One such business is closed between the short and long term. In an economy which is seen facing a decrease in demand, there is a temptation to spend more in economic activities.

Higher public expenditure can certainly increase demand and economic growth in the near term. Apart from this, it can be argued that public expenditure on infrastructure is positive positivity and enhances development and investment. The ministry responsible for power, roads and railways will argue for higher expenditure. Similarly, social sector spending is social benefits on housing, cooking gas, employment guarantee, health, education, pension, agricultural income support and many other schemes. Due to spending on these, the demand can increase.

High fiscal deficit

Increasing government borrowing can lead to private investment. Lower domestic savings will be available to borrow and invest in private sector. The current account deficit could be higher than the high fiscal deficit. Borrowing from overseas can increase. Expansion of external debt can lead to new risks. Credit ratings of India’s sovereign debt may fall, and foreign commercial borrowings can be more expensive by Indian companies, which could increase the interest payments of the dollar. There may be pressure on inflation.

In other words, while at first glance it may seem like a good idea to borrow more, in the long run, it can not be. This can lead to low output of output and jobs.

How is the minister to decide how much to spend and how to finance that expenditure? Should the government take more credit? How good would it be and at what point will it overtake cost benefit?

High tax rates

In an effort to keep the fiscal deficit under high budgetary expenditure, the Minister can consider the option to increase the tax revenues. How should it be obtained?

One way is to increase rates of tax and increase second compliance. The Revenue Department can advise the Finance Minister to increase the tax rates. This makes sense as it is necessary to meet tax goals, and increasing tax rates is a stroke of pen action – it is very easy to increase compliance, which can not be done by an announcement.

There have been many debates over the years of the need to use many data sources from credit cards, travel agents, lifestyle choices, assets and even social media to reduce tax evasion.

There have also been many debates on this matter that there is a need to tax the agricultural income at some level as it provides drawbacks for tax evasion.

Such options, often advocated by economists, are all politically difficult alternatives. As an instrument to increase revenues, the officials who give suggestions often increase the tax rates.

On the other hand, the finance minister must keep in mind the investment environment. If higher tax rates reduce investment expenditure and reduce GDP growth, they may eventually be unfavorable. Investment may fall because high taxes affect post-tax profits. Net impact on investment can lead to lower returns and lower income and jobs.

So how much should the finance minister need to hear the advice of the revenue department to increase the tax rates?

There are many challenges for the new finance minister in an economy standing on the brink of a long-standing recession. How to do business between short and long term, and how to achieve long-term goals through short-term changes are all part of the work of the Finance Minister’s routine, with the immediate goal of all the upcoming finance budgets.

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