The Telegraph
Monday , February 25 , 2013
Since 1st March, 1999
CIMA Gallary

Budget pills target terrible trio

New Delhi, Feb. 24: When P. Chidambaram took over as the finance minister for the third time in July last year, he inherited a slowing economy with high inflation rates and an acute state of policy paralysis.

The Harvard-educated minister has since then kicked in a few reforms, such as FDI in retail and aviation, new bank licensing norms and reduction in oil subsidies, and tried to stem the rot by getting the cabinet to clear long delayed projects. But, the economy continues to be in a sorry state.

India grew 6.5 per cent in 2011-12, the last year that Pranab Mukherjee ran the North Block. In the current fiscal, under Chidambaram’s watch, the economy is expected to grow at 5 per cent, a slowdown of 1.5 per cent.

The fiscal deficit, or the gap between what the government spends and earns, which Chidambaram has bravely tried to rein in by pruning not only subsidies but also defence spending, is still going to be 5.3 per cent of the gross domestic product (GDP). When this is coupled with the deficit of the states, the actual deficit will be as high as 8-9 per cent of GDP. This makes India’s fiscal deficit three-fourth the size of Pakistan’s economy.

Despite pressures from his colleagues, Chidambaram will have to be cautious about spending and garnering revenues — which stand at a tad below 18 per cent of GDP, with taxes contributing to just half of the earnings.

In Brazil, taxes comprise 35 per cent of the revenue, while it is 38 per cent in Russia, 39 per cent in the UK, 28 per cent in the US and a huge 40 per cent in Germany.

India’s dismal tax collection stems from the fact that a mere 2.5 per cent of its population pay taxes, while the rest do not come under any taxpaying category. However, with the general elections next year, checking populist spending will be a tough task, especially when the government is keen to showcase its “right to food” bill which could sap up more money in subsidies from the budget than in any other.

Chidambaram will certainly have to work harder to earn more. One way will be to fast track the goods and services tax. Other possible measures include cutting various exemptions which corporates enjoy and rolling back some of the excise and service tax cuts given to industry after the global recession in 2008.

A surcharge on the income of the “super rich” is considered highly likely as is a commodities transaction tax on the lines of the securities transaction tax to generate taxes as well as to regulate a wildly oscillating commodities market.

Sales of shares in state-run giants such as NTPC and Oil India could not earn the government its targeted Rs 30,000 crore in the current fiscal. But Chidambaram will probably bank on an improving stock market to earn more from aggressive sales of PSU stocks. Similarly, a poor appetite for a badly managed auction of radiowaves fetched India less than Rs 10,000 crore, a fourth of its target. The North Block in conjunction with the telecom department will certainly try again.

Last year, the country’s current account deficit bloated to 4.2 per cent of GDP. The Reserve Bank of India, tasked with managing our foreign exchange reserves, considers this to be alarmingly higher than what is prudent, which pundits at the central bank say should be 2.5 per cent of GDP.

This year the current account deficit is likely to be 5.2 per cent of GDP.

Last week, Moody’s rating service warned that the widening current account deficit and the spurt in external debt meant the country risked a downgrading of its credit rating outlook.

Given that India’s total debt-to-GDP ratio runs at a high 70 per cent, similar to the UK whose rating was cut by Moody’s on Friday, the country needs to attract more dollar and euro inflows.

This should mean more sops for foreign investors, more easing of rules for debt inflows, a sovereign status for rupee-denominated bonds to be issued by public sector companies (but paid for in dollar or euros) and certainly more concentrated attempts at encouraging value-added exports.

The import of gold, the single biggest item of import after oil, needs to be stalled. Similarly, the import of cheap telecom and power gear should be checked by imposing higher taxes or by encouraging local manufacture of substitutes.

The Reserve Bank and the finance ministry would like to see a scheme that would monetise around 20,000 tonnes of gold reserves worth around $1.16 trillion, stashed away in households.

Chidambaram will also have to keep in mind the savings rate which has been falling sharply, putting at doubt India’s ability to reach the professed goal of 9 per cent GDP growth.

According to the RBI, household savings have plummeted to 7.8 per cent of GDP this year from 12.2 per cent in 2009-10. The North Block, many aver, will be looking at ways to encourage the middle class to save more by giving larger tax breaks to pension and insurance products and to buy houses. Some say total exemptions for the aam admi can well go up to Rs 3 lakh.