Latest Union Budget Updates: Budget 2022: Government must create good policies that make investment in start-ups more attractive

This is the time of year when speculation begins about what the Minister of Finance has in store for the country in the coming year. The budget speech has gradually become an event that conveys the government’s intention on the economic front, and therefore, it becomes the most important overall announcement from the government side in the year.

It’s also a time of year when rumors fly fast and loud.

So, instead of speculating on what the finance minister might announce on budget day, let me try to express my views on some of the things the finance minister should be focusing on.

On the budgetary level, the government has already announced its intention to increase the budget deficit from 6 to 6.5% of GDP for the next four to five years.

This has allowed the government to spend far more money than previous governments ever spent. And considering tax revenues are growing at a good pace, that number in absolute terms could be even higher. To put things into perspective, 1% of GDP is equivalent to almost Rs.3 lac crores right now!

I don’t see any big positive or negative surprises in the budget numbers. Tax receipts have been higher than expected and as a result the government will be more comfortable with the deficit figures and will have to show less than usual.

On the social front, the government could announce new megaprojects to woo voters, given the important national elections. As long as these projects are well and timely implemented, each can help improve the nation’s Human Development Index (HDI).

For example, the Jal Jeevan mission (running water in every house) is a wonderful program and is also implemented quite aggressively. A country like ours needs countless such programs to improve the lives of ordinary people.

The government is pursuing its vision of launching major infrastructure projects in the country and I see no reason for this pace to slow down in the current year. With aggressive GDP growth targets in mind, government spending can kick-start private sector capital spending. So I hope that larger allocations can be made for infrastructure spending.

Education and health have always received less attention in the budget exercise. I hope that this year the Minister of Finance will set ambitious targets for education and health and provide significant allocations to these two social sectors.

Foreign direct investment has been of great help in recent years to maintain our balance of payments position at reasonable levels. The influx of foreign currency has boosted the RBI’s reserves to $650 billion and India now has the 5th highest reserves in the world. The government should continue to facilitate business for foreign companies and invite foreign capital.

The universe of start-ups in this regard has played a very big catalytic role in attracting FDI through equity participation in these new era companies. I don’t think it’s necessary for the government to participate in such start-ups. On the contrary, the government must create the right policies that can make investing in start-ups more attractive. It may make sense to bring the long-term capital gains tax of unlisted companies to the same level as that of listed companies.

From a financial markets perspective, the 10% capital gains tax imposed two years ago was an unnecessary burden. The total collection on this front is a tiny number compared to the total tax revenue. I hope the government will reinstate the old tax regime, in which long-term gains from listed shares were tax exempt.

Also, the dividend distribution tax system was much better and more efficient. The taxation of dividends in the hands of the beneficiary increases the total tax payable. I hope this year’s budget reconsiders that.

I don’t see any major tax changes happening in the current year. The government has already given taxpayers the choice of applying a simplified tax structure rather than the old one. Given the pandemic, some exemptions can be made for small and micro businesses, but other than that, I think the tax structures can stay the same.

The next 12 months are going to be critical from a global perspective. Inflation is climbing in most developed economies due to their rampant monetary extravagance of the previous two years. The United States is the biggest culprit among them. In the United States, inflation is now at 6.5% and continues to rise, higher than what we have in India! Suddenly the investment community is waking up and realizing the risks and consequences of such spiraling inflation. In the modern world, most major economies, including India’s, are interlinked.

Therefore, any high volatility in asset prices in these major economies would also have significant effects on Indian markets. In such an uncertain environment, supportive fiscal policy will help reduce volatility for Indian investors.

(The author, Raghvendra Nath is Managing Director at Ladderup Wealth Management Private Limited)