The Hindu Business Line : Now for fiscal consolidation

With the economy on a song, the overriding priority of the Budget should be to push ahead with bold tax reforms and fiscal consolidation. For, better fiscal discipline is the key to ensuring sustained long-term growth of the economy and to make the growth process more equitable, says S. D. NAIK.

The Finance Minister, Mr P. Chidambaram, will be presenting Budget 2007 at a time when the economy is booming. The Central Statistical Organisation (CSO) has now revised upward the country's GDP growth estimate for 2005-06 to 9 per cent from the earlier estimate of 8.4 per cent, mainly on account of higher-than-anticipated growth of agriculture and allied sectors — 6 per cent against earlier estimate of 3.9 per cent. A similar rate of growth has been projected for the current fiscal also.

The gross revenue collection during this fiscal has been projected at Rs 470,000 crore, against the Budget Estimate of Rs 435,000 crore at end March 31, 2007, thus exceeding the target by Rs 35,000 crore. The Centre and the States are reportedly sitting on idle cash of Rs 60,000 crore. Hence, expectations are high that the Finance Minister will use this opportunity to push ahead with some bold measures.

From what the Prime Minister and the Finance Minister have indicated, it is almost certain that the Budget will try to provide a much-needed thrust to the crisis-ridden agriculture and infrastructure sectors. Even so, the overriding priority of the Budget proposals should be to push ahead with bold tax reforms and fiscal consolidation. For, better fiscal discipline is the key to ensuring sustained long-term growth of the economy and making the growth process more equitable.

TAX REFORMS

The Prime Minister, Dr Manmohan Singh, and the Finance Minister, Mr P. Chidambaram, have indicated that there is a need to curtail the number of exemptions available to the corporate sector and individual income tax-payers in order to simplify the tax regime and make it more transparent. While this is desirable, it must be accompanied by a substantial reduction in the prevailing tax rates so that, on balance, the tax regime becomes more benign to the honest taxpayer.

The Finance Ministry's proposed move to do away with the 10 per cent surcharge on corporations and individuals with income over Rs 10 lakh is welcome, but it should really go beyond such small mercies. There is a strong case for a substantial reduction of tax rates and a hike in the exemption level for personal income-tax. Irritants like the fringe benefit tax on companies — which involve a lot of paper work and where the amount of tax collected is not worth the effort — should be done away with.

Tax regime unfair

to the salaried

The prevailing tax regime is particularly unfair to salary-earners and pensioners. They have to fork out a tax not only on income earned but also on their expenditure, in the form of service tax. Even the standard deduction that was available in the past has been done away with. The Finance Minister must restore the standard deduction to salaried persons as they are required to incur many expenses to enable them to perform their jobs efficiently.

There is also a need to rationalise and lower the Customs and Central excise duties. There is, of course, scope for tightening compliance in respect of indirect taxes such as excise duties, which have grown at a mere 6.7 per cent during April-November 2006 despite the booming economy and a surge in direct tax collections.

FISCAL CONSOLIDATION

Equally important is fiscal consolidation. While the Centre's tax revenues rose significantly in April-November 2006, the budget deficit reached nearly 73 per cent of the estimate for the entire year with revenue deficit reaching 99.7 per cent of the budgeted level. The reason is a steep rise in non-Plan expenditure on subsidies, interest payments and grants to the States.

Because of the uncontrolled growth in expenditure, the Government had to even resort to a contraction in non-Defence capital outlays and loans and advances. Plan expenditure, in terms of Budget estimates, has declined under both the revenue and capital account. In April-September 2006, the deficit indicators — revenue and fiscal deficit — fell short of the half-yearly FRBM targets.

The Government's market borrowings also remain high. In 2006-07 (up to January 22, 2007), the issuance of dated securities, at Rs 1,25,000 crore, was higher than the amount raised (Rs 1,15,000 crore) in the corresponding previous period. The use of borrowed resources for meeting current expenditure requirements has resulted in widening of asset-liability mismatches and unusually high outstanding government debt.

The UPA Government has launched many potentially desirable initiatives aimed at providing protection to weaker sections of society, in areas such as rural infrastructure (Bharat Nirman), education (Sarva Shiksha Abhiyan), rural health (National Rural Health Mission), and employment (National Rural Employment Guarantee Scheme). But resources should be found to finance these new initiatives with a combination of reduction of some non-merit subsidies, including those on food and fertilisers, increase in user charges for water, electricity and other services and pruning of outdated schemes.

CONTAINING INFLATION

A new worry that has surfaced now is the spectre of inflation, which has entered the danger zone for the first time in two years and is threatening to undermine the growth process and make the lot of the poorer sections and fixed-income groups much worse.

The Government acted with alacrity and announced some fiscal measures on January 22 to contain inflation by reducing Customs duties on a number of items as also on capital goods and project imports.

The RBI, in its third quarter review of monetary policy released on January 31, raised the repo rate by 25 basis points to 7.50 per cent. It has also increased provisioning requirements for certain kinds of exposures, including standard assets in the real-estate sector.

While these fiscal and monetary measures are, no doubt, welcome to signal caution, the real problem is elsewhere. Inflation during the current year is largely driven by primary food articles and less by manufactured products.

Among the major groups, the prices of primary articles, led by wheat, pulses, fruits, milk and oilseeds, exerted most of the upward pressure on inflation. Overall, the prices of primary articles have increased by 10.3 per cent (5.6 per cent a year ago).

Cause of inflationary pressures

The root cause of inflationary pressures at this juncture are the supply-side deficits in respect of most of the agricultural commodities and food items, following the prolonged neglect of the farm sector. The deceleration of the farm growth rate is also the reason for the rural distress in many parts of the country, as reflected in the spate of farmer suicides.

The bad news is that, despite a modest recovery in agricultural output shown by the revised GDP estimates for 2005-06, there has been a further dip in the share of agriculture in the total output.

For the first time, the sector's contribution to GDP has fallen below 20 per cent, though it continues to employ nearly 60 per cent of the country's labour force.

Against this backdrop, providing a new deal to agriculture by finding ways and means of stepping up public investment in agriculture assumes urgency. And the Budget should provide the broad direction in this regard.