The Hindu Business Line : Balancing growth and deficits

To put the economy back on a higher growth track, fiscal consolidation, simplifying tax laws and employment generation are areas that need priority attention.

There is an urgent need to speed up investment in infrastructure.

S. D. Naik

With unusually high expectations from the electorate and very ambitious agenda drawn up by the newly elected UPA government, all eyes are now on the forthcoming Budget. The Finance Minister, Mr Pranab Mukherjee, who is expected to present his Budget in the first week of July faces a formidable task of striking a balance between delivering on election promises and reining in the soaring fiscal deficit.

The Finance Minister has admitted that there was a need to find ways to bring the economy back to higher growth path without increasing the fiscal deficit. He said the Government would focus on infrastructure, agriculture and employment generating sectors to protect growth and jobs.

Clearly, finding the resources to step up outlays on various flagship programmes and the proposed national food security commitment without further straining the fisc will be a tightrope walk for the minister at a time when the tax revenues of the government would be lower.

While focussing on measures to put the economy back on a higher growth track, the priority areas that will need special attention include: (a) fiscal consolidation; (b) simplifying the tax laws and ushering in a benign tax regime; and (c) employment generation.

Fiscal consolidation

The fiscal discipline of the Central Government has gone haywire over the past two years, more so during 2008-09. According to recent RBI data, net bank credit to the Government — borrowings from the RBI and other banks that participate in government borrowing programmes — rose by a staggering Rs 3,95,330 crore during 2008-09 from a mere Rs 45,632 crore in the previous fiscal. Moreover, the Government has already announced that it will borrow Rs 2,40,000 crore during the first half of the current fiscal.

According to the Finance Ministry, the fiscal deficit during 2008-09 amounted to 6.2 per cent of GDP. But this figure does not take into account off-budget liabilities, including oil and fertiliser bonds. According to the Prime Minister’s Economic Advisory Council, under-budgeted and off-budget liabilities could add up to another 5 per cent of GDP. Thus the real fiscal deficit last year was 11.2 per cent of GDP which is unacceptably high. If we add the deficits of State governments, the picture becomes really scary.

A more worrisome feature of the government expenditure is the uncontrolled growth in revenue expenditure, which is largely unproductive as it is meant for current consumption. During the last fiscal, it outsoared the original Budget estimate by a whopping 337 per cent at Rs 2,41,273 crore, and amounted to 4.4 per cent of GDP.

Hence the least that the Government could attempt during the current fiscal is to rein in the revenue expenditure by cutting down subsidies and prioritising expenditure. The next step should be to aim at fiscal consolidation over the next two-three years to make the economic recovery sustainable.

Some economists have argued that fiscal prudence can wait and that providing further stimulus to the economy should receive priority.

However, given the current fiscal mess, the Government should resist pressures to stretch its finances further. Because of the huge government borrowings, the fiscal and monetary policies have already been working at cross purposes. The soaring fiscal deficit has been rendering the RBI’s monetary policy ineffective and bank lending rates continue to remain high.

Tax reforms

During the previous UPA regime, tax laws were made increasingly complicated and repressive. There is an urgent need to simplify tax laws to encourage better compliance and discourage tax evasion. Today even a salaried person finds it difficult to file a tax return without the help of a consultant.

The former finance minister was particularly unfair to salary earners when he discontinued standard deduction meant for employment-related expenses apart from introducing irritants such as the fringe benefit tax and various other cesses. These need to be done away with to make the tax regime benign.

As for corporate tax, the Finance Minister should consider doing away with all kinds of exemptions (which in any case, only a few large corporate houses are able to enjoy) and reduce the corporate tax rate to around 25 per cent.

Such a step would provide a level-playing field to all segments, including small and medium enterprises (SMEs), without in any way reducing the tax revenues of the Government. Then, there is clearly a need for a hard look at the burgeoning subsidies — both direct as well as indirect — which have failed to benefit the target groups and the really poor.

While continuing the subsidies that are really merited, others could be pruned drastically. In this connection, the proposal to free petroleum product prices is welcome and needs to be pursued in right earnest.

Employment generation

Stemming job losses and generating more employment opportunities hold the key to reviving the sagging demand and putting the economy back on the higher growth path. While growth is important, the accent should be more on employment intensive growth that will come from investments in infrastructure, agriculture, small-scale industries and export-oriented sectors, such as textiles, leather and leather products, and handicrafts.

The growth of the manufacturing sector which is so important for employment generation is constrained by serious infrastructural bottlenecks.

An estimated investment of $500 billon (Rs 23-lakh crore) is required to upgrade India’s roads, highways, ports, airports and the power sector. This is more than 10 times the current level of investment in infrastructure projects.

Hence the Government would do well to explore ways and means to make the public private participation (PPP) model a success. Also it could consider constituting a special fund with participation from LIC, UTI and other institutions, backed by the RBI, with allocation of $20-25 billon from its foreign exchange reserve for investment in infrastructure projects.

There is also a need to induce some of the better performing PSUs engaged in infrastructure, such as power, transport, construction and communication, to expand and speed up their investment programmes. Incidentally, many of these PSUs have substantial reserves which could be utilised fruitfully. Also, the chronically sick PSUs should be sold out to stop the continuing drain on the exchequer.

To put growth on a new trajectory and also to make it more inclusive, the agricultural sector needs to grow at a much faster pace, at least at the planned 4.1 per cent per annum, if not more. There is a need to make quick amends for the prolonged neglect of this vital sector.

To overcome resource constraint, massive amounts of funds allocated under ‘Bharat Nirman’ and National Rural Employment Guarantee Scheme could be better used to boost the asset base of the farm sector, particularly the durable water conservation and minor irrigation projects.

blfeedback@thehindu.co.in

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