The Hindu Business Line : Time to rein in the revenue deficit

The Government should make a concerted effort to prune the revenue deficit. While reducing fertiliser subsidies and better targeting will reduce the expenditure, cutting excise duties will spur growth and thereby help raise revenues.

The 2007-08 Budget had estimated a fiscal deficit of Rs 1,50,948 crore against a budgeted figure of Rs 1,48,686 crore for 2006-07. The financial performance of the Union Government has been published by the RBI for the first nine months (April-November) of 2007-08.

An issue of concern is that more than 80 per cent of budgeted deficit (Rs 81,200 crore) has already been reached within nine months of the current financial year; it is however lower than the deficit figure (Rs 84,483 crore) during the corresponding period of the previous year.

The Government’s finances and pattern of its expenditure produces multiple contractionary or expansionary effects on the economy. The financial performance of the Government is by and large measured in terms of its budgetary deficits. A surplus budget could have non-inflationary pressures but anti-growth linkages, whereas a deficit budget with large gap could have inflationary pressures but could lead to growth in the economy provided the revenue deficit is not large and does not swallow a major part of the resources mobilised from the market.

A government ideally should finance its day-to-day operations and non-developmental expenditures from revenue receipts, leaving some portion for development. If we adopt corporate accounting, the Government should be able to retain some of its revenue as development reserves for capital expenditure. However, poor country governments due to their social responsibilities and mismanagement of resources, incur deficit on revenue account and, as a consequence, a large part of their borrowings have to finance revenue expenditures.

This can be seen in the accounts of the Central as well as States governments in India over the decades, irrespective of the political party in power. So during 2007-08 (April-November) also, the Union Government spent 70.2 per cent of its gross borrowing to finance its revenue deficit. Which implies that our non-productive consumption still needs pruning.

The only consolation is that this ratio was higher than 80 per cent in 2006-07 (April-September). So the Union Government has made efforts to reduce the revenue deficit to Rs 69,974 crore in 2007-08. This improvement may work out still better for the whole year (2007-08).

Underestimation

However, a problem with deficit figures reported by the Government is that of under-estimation due to non-inclusion of significant items of expenditure such as oil bonds, fertiliser bonds, food and power sector subsidies and bonds and borrowings of government undertakings minus transfers to States.

An achievement the Union Government can cite is that market borrowings alone could pool all the resources for covering the entire resource gap, and it did not have to resort to the RBI for borrowing. Thus, the Government is moving towards non-inflationary finance, though borrowing from the market has important implications for distribution of resources between private and government sectors.

One hopes that there will be no crowding out process in the long run otherwise cost of funds will rise. It is imperative on the part of the Government to increase revenue receipts and trim its revenue expenditure.

To avoid the crowding out problem, the Government has to examine ways to enhance its own revenue resources. The RBI figures for April-September 2007-08 show that revenue receipts were sluggish in 2007-08 because of a slowing down of Customs and excise duty collections from 32.7 per cent and 7.4 per cent in 2006-07 to 15.9 per cent and 3.4 per cent respectively in 2007-08. The question which arises in this context is whether we can reduce excise duties at this juncture to raise consumer demand.

Dr C. Rangarajan’s recommendation of cutting excise duty rates to push up demand for consumer goods as well as sales, which will have no impact on excise tax revenue in absolute terms, is a judicious one. Revenues may show exponential growth provided the benefits of lower excise duties can trickle down to consumers.

Tax collections

Among all the components of tax revenue, income-tax collections have grown significantly by 38.2 per cent during April-Sept 2007-08 from 29.1 per cent during the same period in 2006-07, contributing 18.4 per cent to total tax revenue in 2007-08 from 16.5 per cent in 2006-07.

On the other hand corporate tax contributed 31.4 per cent, up from 22.6 per cent in the previous year despite the rate of increase in 2007-08 at 38.1 per cent being lower than 49.2 per cent in 2006-07.

Similarly Customs and excise recorded a dip in their respective shares from 23.1 per cent and 24.1 per cent to 21.5 per cent and 20.9 per cent respectively. It is surprising that corporate tax rates were substantially reduced along with a number of other relaxations such as duty drawback for exporting firms, relatively cheaper land for SEZs along with other infrastructure facilities and tax holiday for industries in backward areas.

These multiple incentives for industry are resulting in wealth concentration and loss of revenue receipts. These exemptions should be abolished. On the other hand, income-tax has been made more regressive. Even senior citizens receiving Rs 10,000-15,000 per month are taxed heavily. Since their monthly payments for service charges to housing societies, telephone bills and medical expenses eat away much of their income, only a meagre amount is left for financing day-to-day expenses. There is an urgent need to raise exemption limit up to Rs 2.5 lakh for senior citizens.

Raising revenue

Increasing taxes on entertainment, cigarettes, liquor and soft drinks can be considered to raise revenue. A new tax on marriage functions where expenditure exceeds Rs 10 lakh can also be considered. Also land holdings by builders and SEZs beyond one year should be taxed.

The issues of higher expenditure on fertiliser subsidies, interest payment on borrowings from the market and increased expenditure on rural development, road transport and highways, education, health, etc., need to addressed urgently.

It would be advisable to reduce subsidies on fertilisers and the subsidised fertilisers should be made available only to small and marginal farmers.

As regards road transport and highways, the Government should price these facilities on cost-plus basis because they are used by the rich and by traders for transporting goods. To prune the revenue expenditure, greater thrust must be given to fiscal consolidation. This will help mitigate the interest liabilities further.

(The author is Chairman of Inter-connected Stock Exchange of India Ltd. E-mail: my.khan@rediffmail.com.)