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With the UPA government's higher public expenditure on social and physical infrastructure in recent years, the avenue for revenue has been shrinking even while the authorities proclaim their commitment to fiscal consolidation, which was reinitiated in the last Union Budget after two years of very high fiscal deficits.
The Prime Minister's Economic Advisory Council (EAC), headed by Dr C.Rangarajan, has highlighted the humongous task in its Review of the Economy released on Monday, stating that “in the medium-term, the Central government may have to raise additional revenues or reallocate expenditures of about 5 percentage points to GDP and this is going to be a formidable challenge”.
Stating that a major proportion of this fiscal adjustment would have to emanate from additional tax revenues, the EAC listed the two major tax reforms on the anvil to generate additional revenues, the implementation of the Direct Taxes Code (DTC) and the Goods and Services Tax (GST), both hopefully from the next fiscal. The EAC has diagnosed after analysing the revised paper on the DTC that while the reform might augment the revenue productivity of direct taxes in the medium term, there might not be notable expansion of the tax base and revenue gains in the short-run.
As noted by the EAC, the increase in revenue productivity will have to come from continued attempts to reform tax administration, review of double taxation agreements and other measures to prevent the flight of income to tax havens and one can look to the General Budget 2011-12, the final Budget of the 11{+t}{+h} Plan (2007-12), to roll out some substantive steps in this regard.
The implementation of GST could bring about fast improvement in revenue productivity unlike the DTC, which could only enhance revenue productivity in the medium-term. Hence, both the Central and State governments should brace themselves to launch this important fiscal proposal to bolster revenues. The hope of meeting additional revenue requirements for food security, increased allocation to education and healthcare will “critically depend on the implementation of GST”, the EAC categorically said.
Reform process
Even as the GST reform is stuck on the constitutional amendment and the constitution of the GST council with the Union Finance Minister as the Chairman, the EAC has asked the Union Government to begin the reform process unilaterally within the extant constitutional parameters. This, it said ,“ requires the Centre to prune the exemption list to the minimum, rationalise the rates of excise duty by converting the specific duties into ad valorem and unifying them with the general rate and extend the tax to all services by converting the prevailing selective tax into a general tax.” Since only a year is ahead before the GST could be set rolling, will the Centre signal its intent through the General Budget it will unveil on February 28 so that the States could take the cue and collaborate in the best spirit of upholding fiscal federalism? The EAC's plea to implement the reform “without much loss of time” is predicated on the logic that “this reform is necessary not only to enhance the revenue productivity but also minimise compliance costs and distortions in revenue allocation”.
The latest EAC report is a repeat of its past litany on the tardy pace of infrastructure creation with the slippages in the power sector remaining uncorrected. Its comment that the slippage in the creation of new capacity is “palpably greater” in the public sector and that the “large commercial losses of State-owned distribution companies is clearly an unacceptable state of affairs” should elicit concern, prompting corrective steps before long.
While its estimates for current account deficit (CAD) at 3 per cent of GDP in the current fiscal and 2.8 per cent of GDP in 2011-12 conceded by it as “the higher levels” might be based on optimism and not realism, given volatile elements such as rising crude oil prices and the gyrations in capital flows in the economy, its call for efforts to bring down the CAD to a more manageable level of 2-2.5 per cent of GDP appears unlikely.
The EAC has urged the authorities to pay due attention by taking necessary steps so that the Indian economy is seen an attractive destination for foreign investors. But this requires determined efforts to bring down fiscal deficit and stay on course in fiscal consolidation in the coming years. The forthcoming Budget would be an opportunity to signal that the government meant business through “credible expenditure management”. Will the Budget do this?
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