Make Growth Top Priority
An admission by FM Mukherjee last fortnight that he is losing sleep with the current state of affairs assumes significance besides being surrounded by negative news on all fronts! North Block recognises that the recent Sensex gain of, rupee appreciation, a marginal downtrend in inflation and RBI's pause on interest rate increase is not going to take us too far in the next fiscal year. My assessment is that the markets and rating agencies have factored in a 5.5% deficit for the current fiscal and if the Economic Survey reveals a figure beyond that, it could ring alarm bells. Taxand India discusses why now more than ever we should make growth a top priority.
2011 predictions gone haywire
In presenting the 2011 Budget, a fundamental assumption of 9% growth rate predicted on the back of ( tax & non-tax ) Revenue Growth led to a fiscal deficit estimate of 4.6%.
It clearly now sounds like a gamble which didn't pay out, though, the signs were visible in the first quarter of the year.
Further, recent media headlines that direct tax collection target will not be met has made the situation sound alarming, though, to some extent is sensationalising. An over 15% growth in direct tax collection and 17% for Indirect tax is no mean achievement for an economy straddling at 7% growth.
Hence, pressure tactics resorted to by the Tax administration to collect more is a counter effective measure and it's sensible to accept that the Government has done a fantastic job on tax collections. To add to the woes, subsidy burden has gone out of control and divestment proceed estimates have been virtually dormant, not to mention the 3G windfall factored in 10-11 deficit figures. None of the figures should surprise us. Therefore, FM's promise in 2011 budget targeting 3.5% deficit in 13-14 would remain a distant dream.
A last opportunity to change course!
We could well see a short to mid-term fiscal discipline course charted out this year as opposed to a mere intent and target setting for a year or two. For political compulsions, very little tinkering can be done to flagship programs, particularly NREGS, however, accelerating food subsidy burden would weigh heavily in FM's mind and rightly so.
This item of subsidy would be interesting to watch for assessing if economics prevail over welfare politics! Given the volatility in crude prices and shaky world commodity markets, a relook at past expert committee recommendations on curtailing petroleum subsidy by guiding them to sections of society who deserve the most would feature.
Making state governments more accountable for delivery and pushing a greater share of subsidies to state have been recommendations from various quarters which could see implementation.
In summary, welfare politics which have caused expansion of entitlements is unlikely to be withdrawn - the question is how it can be curtailed in the future. As regards tax give away by way of reduction in Indirect tax rates, industry has factored an increase in excise and service tax rate to pre crises of 2008 and business chambers are prepared for the change. An increase in corporate tax is unviable as it would be counterproductive given the business cycle and low confidence.
We could well see revenue led fiscal correction
With that expectation, there is only so much that the FM can do to propel revenue given that growth levels in next fiscal year may at best look marginally better than the current year. The two usual non-tax revenue items are divestment and revenues from rebidding of telecom license. Not to forget that there is limited scope on the expenditure side with interest payments (18%), tax sharing with states (17%), Defense and subsidies (9%) being obligatory items with no flexibility for reduction.
Or, serious push for reforms?
I don't know if there are credible options left on policy front which would cut ice with the opposition and can be implemented immediately. GST implementation requires urgent speeding up as the government is losing revenues it would have made by bringing large parts of the un organised economy in the tax net.
Its true that certain state governments will hold out for political reasons and hence, a dialogue with the opposition shall have to be thrust upon. Combination of 13th Finance Commission recommendation for allocating up to 1 lac crore cushion to make up for loss of revenues to larger state coupled with relenting pressure from opposition for greater state autonomy will pave the way for GST. Introduction of DTC is neutral from revenue mobilisation standpoint in the short term, though GST implementation (and elimination of CST) will certainly result in rapid buoyancy. Passage of DTC is not critical and the Government might as well wait for reviewing the standing committee recommendations and introduce a fresh bill in the monsoon session of the Parliament. Progress on negative list for service tax levy is a revolutionary shift and clearly signals GST in 2013. Further delay in tax reforms will prolong India's fiscal containment efforts. Amongst policy initiatives, need of the hour is a time bound plan to push investments in capital infrastructure. Past year has seen a downslide on capital investments, which poses a serious threat to growth for the future. Besides big ticket investments, availability of funding for small, micro and medium sized businesses has been a constraint. With base lending rates at almost 12 percent and large banks facing risk of NPA's due to high exposure to infrastructure, credit flow has stagnated. This has had its impact on index of industrial production and the outlook seemingly bleak.
Promoting growth should feature on the top of the agenda with low hanging fruits by way of policy push and ease in flow of credit. We shall wait and see what fiscal legacy this Government leaves behind given that 2013 budget will be dominated by political compulsions.
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First published in the India Business Standard, 27 February 2012