If Finance Minister P. Chidamabaram needs a mantra to focus on as he gets down to the final stages of framing Budget 2012-13, it has to be Revenue Deficit.
That’s the message from a former government economist, who had been closely involved in the formulation of the country’s five-year plans.
Containing the revenue deficit (the gap between the government’s recurring income and its running expenses) should be one of the top priorities of the budget, Pronab Sen, former principal economic advisor at the Planning Commission told Firstpost.
“The government is running a revenue deficit which is way beyond what the economy can handle,” warns Sen. Steps to control inflation and curb the current account deficit (when a country spends more foreign exchange than it earns) will not mean very much if the government fails to put a lid on the revenue deficit, he asserts.
Restoring the original spirit of the Direct Tax Code (DTC) and stimulating investments in infrastructure are two other priorities that Sen would like to see the finance minister addressing.
The magnitude of the fiscal deficit (the gap between a government’s total income and total expenditure) has Sen worried and he feels this can be contained only by a combination of raising revenues and cutting expenditure.
“Taxes will have to be raised, there are no two ways about that,” he asserts.
How to do that is the key. Sen would rather see this happening through an increase in the number of people paying taxes rather than increasing the tax rates. A simple, transparent and non-discriminatory direct tax system was, he points out, at the heart of the DTC that Chidambaram had articulated during his earlier stint as finance minister. But the revised DTC abandoned that philosophy and he wants this philosophy coming back.
He is also in favour of withdrawing a slew of tax exemptions that are currently given. Though India Inc is likely to protest strongly, removal of exemptions, Sen argues, creates space for lowering of rates and it won’t have a negative impact unless it is accompanied by an increase in tax rates.
The success of any proposed move to tax the super rich, he says, will depend on the definition of this set. “What you want to avoid is defining the cut off limit in a manner where simple kinds of ambitions are adversely impacted.”
Raising revenues from indirect taxes – especially excise duty - is another option before the government. Sen pooh-poohs apprehensions that this will have an inflationary impact.
“Tax increases and petroleum price increases are not going to push up inflation.” Indirect tax increases, he argues, do not set off inflationary expectations, which is what sets off the inflationary process.
Cost control measures to trim the fiscal deficit are a bit more complicated and Sen says it involves a political choice – between untargeted subsidies and directed welfare programmes. The government, he says, will have to decide which one to push; it cannot continue with both. Among the untargeted subsidies, he would like to see the fuel and fertiliser subsidies being pared down. In the case of food, the cost of holding foodgrain stocks is much more than the actual subsidy, he points out.
Given that the budget is just a year away from the 2014 elections, can it be reasonably expected to pare the subsidy bill or refrain from populist schemes? Sen doesn’t see the forthcoming budget as a pre-election one; next year’s budget will be, he says. There’s scope this year, he feels, for the finance minister to be tough and eschew populist giveaways.
The Reserve Bank of India may have done its bit to revive investments by its recent rate cuts, but Sen says it is now 'absolutely essential' to get infrastructure investments started. That will go a long way towards shaking Corporate India out of its lethargy and start making investments. The government, he points out, had taken steps in earlier budgets to address the problem of infrastructure financing but none of them had delivered the desired results.
Chidambaram, he says, needs to focus on ensuring that they do. Containing the fiscal deficit and giving infrastructure investments the required momentum will go a long way in perking up investments by the private sector, he feels.
On the indirect tax front, Sen would like to see the Goods and Services Tax (GST) regime getting implemented. He’s not sure, though, whether it will happen even in the next financial year because of the 2014 elections.
As a step towards the GST regime, service tax is likely to be widened to practically all areas. Sen doesn’t think this will have an adverse impact on the economy, unless it becomes a tool for harassment.
“When you bring a section under the tax net, you need to give a little bit of time for people to comply. Expecting overnight compliance may be okay by law but it is not okay by any administrative logic.”
more in Budget 2013