Saturday, July 19, 2014

Paranormal Activity - How Para 102 is a hidden gem in Jaitley's budget

Majority of people missed a very important piece of announcement on the budget day. Even I did not think about it till I decided to read the full budget transcript this Friday evening – yeah, that’s how I spend my Friday nights.

I found a hidden gem in the orgy of information and announcement in the para 102 – just where the discussion about MSME sector starts. Here is the snapshot:


And now why this para is important. Before I start torturing my keyboard, here is a snapshot from India Market Strategy Report from Credit Suisse published in July 2013 – exactly a year ago.



The report cites and analyses National Statistics Commission data and reckon that Half of India’s GDP and a whopping 90% of its employment is generated in informal sector. The report also mentions that “Unlike in the developed economies where informality is purely a deliberate choice to avoid taxation or regulations, in India it is more structural: a reflection of the lack of development and limited government reach.”

This does not mean that GDP of India is underestimated by 50%. Nah. GDP of any country is anyway an estimated number – but this estimate is particularly doubtful and is bound to get revised, hopefully upwards, if 50% is outside the reach of government surveyors. Government conducts surveys, updates its methodologies and its GDP calculation series every few years. Last time it was done GDP calculation jumped by 0.6% annualized for all years in the series. See the chart below.


This data has implications for taxpayers also. It is a well-known fact that India is one of the most taxed countries in the world. And it is by definition, informal sector is outside the purview of tax authorities. So the formal part of the economy gets taxed heavily.


What Arun Jaitley has tried to do in his maiden budget is sort of recognize the contribution made by the informal sector – Own account enterprises and decided to set up a committee to study ways to reach, cover, finance and then maybe tax them.

When countries around the globe are busy finding ways to generate income from erstwhile illegal activities – for example, sale of marijuana in some US states (read here, here and here), India already has all the money on the table but not in the record books.

If India is able to make some significant progress in this area, not only India will have higher reported GDP, better employment records but also better insurance and banking penetrations, more people under social security net and in the meanwhile tax net will increase and will bring more equity to the taxpayers around the country.

Wonder, where is the debate over this?

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