Events & Issues

New Delhi, 22 February 2011

Budget Blues

FISCAL CONSOLIDATION MUST

By Col. (Dr.) P. K. Vasudeva (Retd)

Only three days are left for the announcement of the Budget for the fiscal 2011. The UPA Government, in its second innings, has an opportunity to actually script a more inclusive infrastructure-based growth. But, to do that would require much more than just a ‘popular’ Budget.

With unusually high expectations from the electorate and a very ambitious agenda drawn up by the Government, all eyes are on the Budget. The Finance Minister Pranab Mukherjee faces a formidable task of striking a balance between delivering on election promises and reining in the soaring fiscal deficit.

He has made plain the need to find ways to bring the economy back to a higher growth path without increasing the fiscal deficit. Whereby, the Government would focus on infrastructure, agriculture and employment generating sectors to protect growth and jobs.

Clearly, finding the resources to step up outlays on various flagship programmes and the proposed national food security commitment without further straining the fiscal will be a tightrope walk for the Minister. Specially,  at a time when the tax revenues of the Government would be lower, unless all out efforts are made to retrieve 85 lakh crore rupees black money stashed in foreign banks . This is unlikely as the involvement of the rulers themselves is at stake.

While focussing on measures to put the economy back on a higher growth track, the priority areas that will need special attention include: (a) fiscal consolidation; (b) simplifying the tax laws and ushering in a benign tax regime; and (c) employment generation.

The fiscal discipline of the Central Government has gone haywire over the past two years, more so during 2008-09. According to recent RBI data, net bank credit to the Government, borrowings from the RBI and other banks that participate in Government borrowing programmes, rose by a staggering Rs 3,95,330 crore during 2008-09 from a mere Rs 45,632 crore in the previous fiscal. Moreover, the Government has already announced that it will borrow Rs 2,40,000 crore during the first half of the current fiscal.

According to the Finance Ministry, the fiscal deficit during 2008-09 amounted to 6.2 per cent of GDP. But this figure does not take into account the off-budget liabilities, including oil and fertiliser bonds. According to the Prime Minister’s Economic Advisory Council, under-budgeted and off-budget liabilities could add up to another 5 per cent of the GDP. Thus, the real fiscal deficit last year was 11.2 per cent of GDP, which is unacceptably high. If we add the deficits of State Governments, the picture becomes really scary.

A more worrisome feature of the Government expenditure is the uncontrolled growth in revenue expenditure, which is largely unproductive as it is meant for current consumption. During the last fiscal, it outsoared the original Budget estimate by a whopping 337 per cent at Rs 2,41,273 crore, and amounted to 4.4 per cent of GDP.

Hence, the least that the Government could attempt during the current fiscal is to rein in the revenue expenditure by cutting down subsidies and prioritising expenditure especially uncontrolled foreign visits by politicians and bureaucrats. 

The next step should be to aim at fiscal consolidation over the next four to five years to make economic recovery sustainable. The overdraft by the State Governments needs to be curbed stringently. They must learn to generate revenue and follow the Gujarat and Bihar Governments models.

During the UPA I regime, tax laws were made increasingly complicated and repressive. There is an urgent need to simplify tax laws to encourage better compliance and discourage tax evasion. Tax raids at regular intervals would help consolidation of the fiscal. Today, even a salaried person finds it difficult to file a tax return without the help of a consultant.

The former Finance Minister, Chidambaram was particularly unfair to salary earners when he discontinued standard deduction meant for employment-related expenses, apart from introducing irritants such as the fringe benefit tax and various other cesses. These need to be done away with to make the tax regime benign.

As for corporate tax, the Finance Minister should consider doing away with all kinds of exemptions (which in any case, only a few large corporate houses are able to enjoy) and reduce the corporate tax rate to around 25 per cent. Such a step would provide a level-playing field to all segments, including small and medium enterprises (SMEs), without in any way reducing the tax revenues of the Government.

There is also a need for a hard look at the burgeoning subsidies, both direct as well as indirect, which have failed to benefit the target groups and the really poor. While continuing the subsidies that are really merited, others could be pruned drastically. In this connection, the proposal to free petroleum product prices is welcome and needs to be pursued in right earnest.

Stemming job losses and generating more employment opportunities hold the key to reviving the sagging demand and putting the economy back on the higher growth path. While growth is important, the accent should be more on employment-intensive growth that would come from investments in infrastructure, agriculture, small-scale industries and export-oriented sectors, such as textiles, leather, leather products and handicrafts.

Further, the service sector has better potential for employment generating opportunities. But the growth of the manufacturing sector, which is important for employment generation, is constrained by serious infrastructural bottlenecks. An estimated investment of $500 billon (Rs 23-lakh crore) is required to upgrade India’s roads, highways, ports, airports and the power sector. This is more than 10 times the current level of investment in infrastructure projects.

Hence the Government would do well to explore possibilities to make the public private participation (PPP) model a success. It should consider constituting a special fund with participation from LIC, UTI and other institutions, backed by the RBI, with allocation of $20-25 billon from its foreign exchange reserve ($295 billion) for investment in infrastructure projects.

There is also a need to induce some of the better performing Public Sector Undertakings (PSUs) engaged in infrastructure, such as power, transport, construction and communication, to expand and speed up their investment programmes. Incidentally, many of these PSUs have substantial reserves, which could be utilised fruitfully. Simultaneously, the chronically sick PSUs need to be divested.

Indeed, to put growth on a new trajectory and make it more inclusive, the agricultural sector too needs to grow at a much faster pace, at least at the planned 4.5 per cent per annum, if not more. There is a need to make quick amends for the prolonged neglect of this vital sector especially irrigation and power. ---- INFA

(Copyright, India News and Feature Alliance)