The budget proposals scheduled for next month will be the new government’s first major milestone and a touchstone for its economic philosophy in the years to come. The government must seize this opportunity and aggressively build the foundation for sustained and inclusive growth. There are six key areas that this budget should cover.

First, the fiscal deficit needs to be contained but not substantially reduced. There is a fine balance that the government has to maintain by providing an economic stimulus and investment, but by not being profligate. Expenditures must be made in areas that will have a long-term impact on the economy like education, infrastructure and health. Within education, there is a strong need for financial literacy.

Second, the FDI limits in insurance must be increased from 26 per cent to 49 per cent. This proposal has been in abeyance for too long now and the proposed increase will bring much needed capital into the industry. There are several other amendments that are needed in the Insurance Act and these are built into the bill that is currently pending with the Rajya Sabha. It is ironical that an industry which opened up in 2000 is still governed by laws that were written in 1938, prior to India becoming independent. Increased FDI will also go a long way in spurring investment into the country.

Third, the Pension Bill must be approved in parliament. The New Pension Scheme (NPS) has had a rough start but such teething issues are normal. The fundamental need for retirement planning is indisputable as is the fact that the government cannot afford to run unfunded pension plans. The proposed move from defined benefit to defined contribution pension for government servants is welcome as is the extension of the NPS to the unorganized sector.

Fourth, taxes on financial products need streamlining. The current tax regime does not recognize the differences between long-term financial products that run for over ten years and shorter-term products. We would strongly urge the government to declare any financial product, including insurance, that has a maturity-tenure of 10 years or more, completely tax exempt. India has one of the highest savings rates in the world. Such incentives will ensure that household savings are moved from unproductive assets into more productive, interest-bearing areas. 

Fifth, the government must address tax evasion. There is a sizeable parallel economy in India and the press has frequently reported that overseas banks have billions of dollars of such unreported income. This wealth must be brought into the mainstream. A voluntary disclosure scheme that allows this money to be brought back and taxed might be one approach to address this issue.

Finally, the government must establish key performance objectives for each ministry and these should be publicly reviewed every six months. Such an approach will go a long way in increasing the accountability of the government towards the public.