Need to restore fiscal balance
FM’s Budget should express his resolve on pressing issues
By Dr Rajiv Kumar
THE
forthcoming Budget has a lot hanging on it. Given his accumulated
wisdom gathered over decades of political leadership, the Finance
Minister surely realises that the Budget offers an opportunity to turn
around the rather downbeat mood in the country about its economic
prospects. The first imperative for the Budget,
therefore, must be to ensure that it is not another routine statement of
government accounts and rises above it to be seen as a policy statement
of a government that is seized of the issues facing the economy and is
committed to address them.
Therefore,
the Budget should include some major policy initiatives, like the
notification of the rules for permitting 100 per cent FDI in multi-
brand retail; permission for 49 per cent FDI in civil aviation;
notifying Aviation Turbine Fuel as a ‘ declared good’ that attracts a
Central Sales Tax of 4 per cent; removal of Minimum Alternate Tax from
SEZ units, which is causing considerable distress having been applied
even for units
that were established on the premise of hundred per cent tax exemption.
Measures
Such
changes in the tax and policy regime are highly avoidable as they
create policy uncertainty for investors. The Budget should also announce
the exemption of all perishable agriculture products from the ambit of
the Agricultural Produce Marketing ( Regulation) Act and its immediate
implementation in UPA ruled states like Delhi and Maharashtra and
stipulate a minimum tariff for electricity supplied to farmers, again
starting its implementation
in UPA states.
It
should be pointed out that none of these announcements require any
legislative clearances and can therefore be implemented right away.
Including them in the Budget, rather than announcing them piecemeal,
will create much greater positive impact and show the Finance Minister
to be in control of the economic situation and as the leader of the
government's economic team.
The
Budget would do well to put a high growth rate back on the agenda. For
India eliminating degrading and dehumanising poverty by creating
hundreds of millions of employment opportunities is far more important
than trying to achieve greater income equality. The Budget would do well
to emphasise that poverty will not be eliminated by creating a vast and
unsustainable network of entitlements but by empower- ing our people by
imparting them skills
and employing them in productive jobs. All this will happen only if all
of us recognise that a seven per cent rate of growth, though undoubtedly
high by international standards, is simply not good enough for India
given the need to generate millions of new jobs and meet the high
aspiration levels of our young population.
Achieving high growth over sustained periods, requires commitment to macroeconomic stability.
An
essential component is to ensure fiscal balance. Given the economic
slowdown, fiscal targets are under severe pressure. A likely scenario is
that the central government's fiscal deficit will cross 5.8 per cent
and the combined deficit of the state and central governments will
perhaps reach double digits. This will not allow interest rates to come
down and will crowd out private investment that is already at
unacceptably low
levels.
Revenues
Given
the stickiness of public expenditures and, in fact, severe pressure to
expand it further on various subsidies like food, fertilisers,
petroleum, education, electricity, etc, revenues have to be increased.
Tax revenues as a percentage of GDP have declined since 2007- 08 falling
to 14.73 per cent in 2010- 11 from 17.36 per cent in 2007- 08. Direct
tax revenues have also declined, from 6.39 per cent in 2007- 08 to 5.48
per cent in 2010- 11.
Thus, there is both need and scope for expanding revenues.
Currently,
we have only 34 million personal income tax payers in the country and
96 million PAN card holders. This implies that barely a third of the
households pay income tax. With another third of the households below
the poverty line, it still leaves another third or 80 million eligible
households outside the tax net.
This
needs to be rectified. An expansion of the tax net will also remove the
pressure to raise rates. Of those currently in the tax net, a minuscule
number, about 10,500 persons, declare incomes of above Rs 10 crore. I
am convinced that there are more people earning Rs 10 crore in Mumbai
alone! And only 110,000 declare their annual incomes to be above Rs 1
crore, which again should be simply unacceptable. A thorough reform of
the direct tax
administration is long overdue and should be initiated in the
forthcoming Budget.
The
need for increasing tax revenue brings back the issue of taxing
agriculture incomes. This has simply been taken off the agenda and
perhaps rightly so given the overall backwardness of our agriculture and
the administrative costs of collecting these taxes.
But this has now become a major source of direct tax evasion. It is time that this loophole is closed.
One
way forward could be to tax all incomes in which agriculture income
constitutes less than a given percentage. An increase in direct tax
collections, will decrease the dependence on revenues from indirect
taxes which is progressive making Indian industry more competitive.
The
Budget may also announce some measures to raise non- tax revenues.
Given the negative stance of equity markets in 2011- 12, there is little
hope of attaining the divestment target of Rs. 40,000 crore. The Budget
should encourage the consideration of bolder steps such as finding
strategic buyers for public sector units and assets. We have to get over
this self- imposed ban on outright privatisation of poorly performing
public sector entities
in sectors such as airlines, hotels, mining, construction, among others.
How long will the taxpayers continue to acquiesce in a mis- utilisation
of their taxes in shoring up loss making public sector enterprises
which do not even remotely serve any strategic functions? All these
above measures will show the Finance Minister's resolve to achieve
fiscal prudence and restore macro- economic stability.
This
would be a strong signal for investors that India is moving away from
populism and reverting to the path of high growth with macro stability.
As a complete contrast, any allocation in the Budget for implementing
ill conceived and poorly designed entitlement schemes will send the
completely wrong signal and significantly worsen the investment climate.
Higher growth in revenues, both tax and non- tax, as suggested above, will create the fiscal space for three necessary measures.
First,
the Budget should announce the continuation of the explicit tax
exemption of recognised NGOs, chambers of commerce, industry
associations and charitable organisations. These organisations often
play a vital role in industrial development and social uplift of weaker
sections. As long as their surpluses are used for their designated
activities, their incomes and surpluses must remain exempted. The
underlying principle of taxation should
consider the final use of these surpluses rather than generation of
surpluses themselves.
Welfare
This
will endear the Finance Minister to civil society and also remove a lot
of unnecessary confusion that prevails currently. The second measure
that will be possible with greater fiscal space is a doubling of
expenditure on public health, which remains among the lowest in the
world. More than two thirds of expenditure on health is still private.
This not only creates avoidable inequities but also forces a relapse
into poverty of households
that may have worked hard to come out of it. The disbursement of these
additional funds could be made conditional on achieving some minimum
governance standards that will improve the delivery of public health
services in the states.
Finally,
now that the Right to Education has been enacted, the government must
be committed to ensuring universal access to secondary education. This
will also require a huge expansion in education sector outlays, which
the Budget should announce as part of a medium term plan of resurrecting
the public education system in the country. However, here again,
additional disbursements should be made conditional on achieving better
governance in all
aspects of the public education system, with the responsibility lying
primarily with the states.
The writer is secretary general of FICCI. The views expressed here are personal
