INDIRECT TAXES
| Economic implications of the Union budget Mon, 07 Mar 2011 |
| The immediate economic target for the Union budget is how to moderate inflation without sacrificing growth. The fiscal policy has to be a blend of immediate tax and expenditure measures for achieving this objective. This involves a reduction of budgetary deficit and borrowing by the government as a complementary support to monetary policy of the Reserve Bank of India which has been raising the interest rates in instalments in the last one year. How far has this been accomplished merits examination. Fiscal deficit The fiscal deficit is higher at Rs. 4 lakh crore in the Revised Budget 2010-11 against 3.81 lakh core in 2010-11 Budget Estimate. Also in 2011-12 Budget it is even placed higher at Rs. 4.12 lakh crore. On the taxation side the reduction in excise and service tax effected earlier as fiscal stimulus has not been withdrawn. There has been marginal liberalisation in income tax through higher exemption limits and reduction of surcharge on corporate tax. Some incentives have been given for putting up storage facilities. There has been no compression of expenditure and no major reforms in public expenditure. Small provisions have been made for vegetable initiative and oil palm cultivation .The total expenditure in RE 2010-11 is Rs.12.16 lakh crore and in BE 2011-12 at 12.57 lakh crore as against Rs.11.09 lakh crore in BE 2010-11 . The key features in the budget documents have recognised stronger fiscal consolidation and a structural concern in inflation management. While it cannot be achieved in one year the medium term fiscal planning should tackle this. The need to control budgetary deficit and government borrowing was recognised in 2003 when the Fiscal Responsibility and Budget Management Act was passed by Parliament. This is a historic fiscal legislation more than 50 years after Independence. This prescribed a five year period for eliminating revenue deficit and bringing down fiscal deficit to 3 per cent of GDP. The track record of the government in implementing this is depressing. According to the projections for 2013-14 given in the latest budget, revenue deficit will still be there and fiscal deficit at 3.5 per cent of GDP even after ten years of implementing the FRBM Act. What is more worrying is the approach in dealing with the causes for fiscal imbalance. Spectrum auction The revenue buoyancy and one time revenues like spectrum auction contributed to a sense of complacency in achieving the deficit targets. Many devices were used to meet the targets, for example, special bonds for oil subsidy were issued (now discontinued). In the latest budget there is a revision in the base year for calculation of the GDP by the CSO. Historical estimates of the GDP have undergone a change with effect from 2004-05. Revised data show annual growth of GDP in 2009-10 increased to 8 per cent at factor cost compared with 6.8 per cent in 2008-09. Latest data puts the rate at 8.6 per cent in 2010-11. The obsession with quantitative targets has relegated the basic underlying issues on revenue and expenditure side to the backburner. There are many problem areas calling for reform. These have to be identified and reform measures initiated in a time bound manner. The medium-term road map for fiscal consolidation has to be based on this. The latest budget has promised an amendment to FRBM Act laying down the fiscal road map for the next five years to be introduced in the course of the year. Hopefully at least this road map will address the issues . A few examples can be cited. On the revenue side, tax deductions exemptions accounted for Rs.2.22 lakh crore in 2009-10 as per latest budget. This does not figure as an item in the budget as the revenue is shown net in budget and accounts. Arrears of tax collection amounted to Rs.1.45 lakh crore. The Finance Minister has commissioned a study on unaccounted income and wealth held within and outside the country. On the expenditure side, a review of basic functions and schemes will be undertaken. The budget instructions require the ministries to review the existing Expenditure Budget in the first instance to prioritise the activities and schemes, on plan and non plan side, and identify those which can be eliminated or reduced in size. To facilitate prioritisation, the artificial classification into Plan and non-Plan has to be changed. At last a committee has been asked to examine this. The effectiveness of expenditure by using the output and outcome budgeting as a management tool will be examined. The closure of sick and cash loss companies will be looked into as they drain on government resources. Quasi fiscal borrowings by government agencies will be highlighted while discussing fiscal deficit and government borrowing. The full budgetary implications of schemes and statutory responsibility of government has to be reflected in medium-term projections, example, Food for Security Act when passed , inflation indexed wages in Employment Guarantee Scheme and the Right to Education Act. The basic reforms in subsidies, both policy and implementation and spelling out assumptions for projections, example, oil and fertilizer prices will have to be seriously looked into. The latest railway budget has imposed a heavy burden on the general budget. Also heavy borrowing from market is projected which is quasi fiscal deficit. There is a cross subsidy of passenger fares by freight. This is particularly objectionable when government is trying to deal with inflation. The rationale for a separate railway budget merits a second look. At least a tighter control of railway budget is needed. The operating ratio defined as working expenses to revenue has deteriorated to 92.1 per cent (for good working results, a ratio in the seventies is considered healthy. The fiscal policy has to work in tandem with the monetary policy. Heavy fiscal borrowing places undue strain on RBI which has voiced its concern on the importance of fiscal consolidation. Fiscal sustainability is necessary to induce consumer and investor confidence and expectations which is a crucial factor in inflation, flow of foreign direct investment and economic development. The Union government has also an indirect responsibility for fiscal consolidation in states as it can use the leverage of annual transfer of funds to them. |
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