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Rx: Growth boosters for the economy

This budget should put the economy on steroids by fixing the fisc

Written by Chandrajit Banerjee |
March 2, 2012 12:17:16 am

This budget should put the economy on steroids by fixing the fisc

Economic developments since the last budget have shown that making advance assessments about the economic environment is challenging. In fact,such developments lend credence to the maxim,“hope for the best,but prepare for the worst.”

The worst may not quite have come to pass,but neither did the fiscal year live up to our hopes. Global conditions did not pick up as expected,and indeed,remained under considerable duress. At home,inflationary pressures led to monetary tightening,which in turn compressed demand,investment and industrial production down the line. Growth came in at 1.5 percentage points lower than assumed and consequently,the fiscal deficit and the government’s borrowings seemed to go out of hand.

For the upcoming budget,the revival of growth and investment is the primary focus. But what levers are available for this task? Critical macroeconomic variables will need to be differentiated into those that can be influenced positively and those over which little control can be exercised.

The global environment will fall into the latter category,given that the eurozone is dropping into recession and that austerity measures would squeeze out manoeuvring room. Similarly,inflation will depend on the monsoon. It will also depend on supply-side expansions,but those would take time to take off in any significant manner. The RBI has not yet scaled down its tight monetary stance,and even if interest rates are brought down,they would operate on a lagged basis. The only real option for the budget to act as a growth stimulant is,therefore,to manage the fiscal deficit.

In the previous budget,the total receipts of the Central government were expected to increase by 9.7 per cent and expenditure by a prudent 3.4 per cent. Fiscal deficit was estimated at a respectable 4.6 per cent,promising further curtailment to 3.5 per cent by 2013-14.

As things stand,the fiscal deficit is more likely to come in at close to 6 per cent. Net tax revenue increased by only 8 per cent in the April-November period and non-tax revenue declined by almost 60 per cent. But total expenditure went up by 10 per cent,mostly because of rising interest payments. Such a high level of fiscal deficit has a significant downstream impact on other macroeconomic variables,pushing up effective interest rates,crowding out private investments,raising public interest burden for the future and limiting the RBI’s inflation control steps. A strong effort will have to be made to ensure fiscal figures remain at a prudent level of 4.1 per cent. The options for restraining fiscal deficit are available on two fronts,augmenting revenues and controlling expenditures. Our pre-budget recommendations have suggested several actions under each head.

To begin with,the Fiscal Responsibility and Budget Management Act,which expired in 2008-09,needs to be amended. This would lay out a clear roadmap on the fisc for the next five years,infusing discipline and bringing comfort. Two,the implementation of the Goods and Services Tax (GST) and Direct Taxes Code (DTC) must not be delayed any further.

A short stimulus under the current fiscal condition could be to increase the depreciation rate on plant and machinery to 30 per cent from the present 15 per cent for a period of two years. This can be augmented by allowing companies to claim 50 per cent depreciation in case of retrofitting,which makes a company become more environment friendly – again for a period of two years.

GST can add as much as 1-1.5 per cent to the GDP growth annually by making India a single market for unimpeded flow of goods and services. However,care must be taken to make it comprehensive,including critical sectors like petroleum and bringing entry tax,electricity duty and other taxes in its ambit. Despite the political dimensions of this landmark reform,we can only hope our political leaders would rise above party lines and work constructively to achieve convergence on this most important reform of all.

The DTC,once implemented,would lead to a systemic simplification,but certain provisions such as residency rule,General Anti Avoidance Rules (GAAR),treaty override etc,must be carefully amended to ensure it does not become a business-unfriendly tax system.

Social programmes can be made more productive in terms of outcomes per rupee spent by plugging leakages,reducing corruption through stringent action,preventing cost overruns,etc. Private sector participation in social programmes such as healthcare could help add efficiencies. Disinvestment,widening of the tax base through a service tax system based on a negative list,unlocking unproductive government assets and clearing funds in dispute could further augment revenues.

On the expenditure side,subsidies have been running far ahead of targeted estimates. A holistic look at subsidies needs to be undertaken,given the poor are hardly protected from higher costs,and that large distortions arise in the use of fertilisers,power,water,etc. Cash subsidy for the delivery of kerosene,LPG and fertilisers could better target deprived populations.

While fiscal restraint itself would spark private investment,industry expects the budget to address additional well defined measures to boost new project plans and restore business confidence. Agriculture requires modern farming techniques,scientific inputs and support for small and medium farmers. Power capacities must be expanded. Education and healthcare remain huge tasks to be addressed intensively. The potential of small and medium enterprises and new entrepreneurs must be unlocked through access to finance and technology.

Much of the budget action will be in the domain of direct and indirect taxes. Industry has called for the elimination of surcharge and cess on corporate tax while boosting demand through wider tax slabs for personal income. Likewise,indirect taxes such as excise,customs duty and service tax are best left untouched as we prepare for the GST.

Banerjee is director general,Confederation of Indian Industry

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