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 Tax Freedom
 
Budget - Shape up or ship out
Business Standard, India Saturday, February 12, 2011


Mukherjee needs to enforce spending discipline or else the government will be the biggest loser. Ironically, everyone wants the fiscal deficit to be fixed but no one wants to pay for it. There is little scope for an outsized surprise on the revenue front for next year. Spending is where the government’s commitment to fiscal consolidation will have to take a litmus test, and the counter-cyclical surge in spending in the last two years has to be corrected now, writes Rajeev Malik in Business Standard.

The Budget for 2011-12 takes place in the background of a dramatically different domestic and external economic setting than was the case with the previous two Budgets of the Congress-led government headed by Prime Minister Manmohan Singh. Given the multiple global uncertainties owing to the global credit crisis, fiscal measures were liberally adopted to cushion the hit to growth. However, now the global economy appears to be on the mend, despite the still prevalent risks to the economic outlook. And India’s growth has been above trend despite a weak recovery in investment (thanks partly to some ministries), and a combination of cost-push and demand-pull factors have reignited worries over inflation. Indeed, the script used in the previous two Budgets cannot be used again.
 
The third consecutive Budget by Finance Minister Pranab Mukherjee in the second straight term of the United Progressive Alliance (UPA) will sow the seeds of either strengthening India’s economic dynamics or inadvertently engineering a much weaker economy with persistent higher inflation. The former will contribute positively towards the ultimate political objective of the Congress party, while the latter could perhaps ultimately see the UPA out of its current job.

...

Hindsight is a great teacher, and we are all better analysts after the fact. Rather than expending energy debating whether the government went overboard on spending during the global economic crisis, the key is the urgent need to recalibrate fiscal policy so that convincing consolidation of public finances is the main outcome. Fiscal policy should be working in tune with monetary policy to ensure sustainable elevated non-inflationary economic growth.

So far, the bulk of the heavy lifting on policy normalisation has been done by the RBI, and it is time for the government to deliver its share. Ironically, the government’s actions are partly responsible for adding to the current inflationary pressures due to a combination of pumping up aggregate demand via heavy spending and from inaction in removing structural rigidities that have only worsened the supply-demand imbalance.

...

The fiscal deficit in 2010-11 is likely to be better than the Budget target of 5.5 per cent. The government had last year guided for shrinking the fiscal deficit in 2011-12 to 4.8 per cent of GDP, but it should strive to better that given the recent upward revision in nominal GDP. Attaining that goal will be challenging in the absence of the spectrum auction intake of around 1.5 per cent of GDP 2010-11, and will have to rely on spending restraint. Also, fiscal consolidation cannot just rely on one-off gains in revenue. Even at a slightly lower fiscal deficit (as per cent of GDP) next year, the borrowing by the government will be sizeable, and will undoubtedly create headaches for the RBI on liquidity management, especially if capital inflows are more subdued than last year, as is likely to be the case.

Ironically, everyone wants the fiscal deficit to be fixed but no one wants to pay for it. There is little scope for an outsized surprise on the revenue front for next year. Divestment will probably be pegged around Rs 40,000 to 50,000 crore and the finance minister should avoid handing out any goodies for now, including raising the exemption limit for individuals. Individuals benefitted from favourable tax measures in the last two years, and will benefit again next year when the Direct Taxes Code is implemented.

...

Spending is where the government’s commitment to fiscal consolidation will have to take a litmus test, and the counter-cyclical surge in spending in the last two years has to be corrected now. The employment guarantee scheme, infrastructure and agriculture will be key thrust areas, but effective implementation and results are as important as higher spending. Cutting subsidies will remain a pressing issue, and, rather than wait for the right time, the government should at least move forward in small steps if a full one-off deregulation of fuel prices is not feasible. The spread-out short-term hit to inflation is worth the cost for gaining medium-term fiscal improvement, which, in turn, will facilitate economic growth and also positively affect inflation over the medium- to long-term. The government can move along these lines either in a managed manner or these could be forced on it in the form of a crisis-like situation that will also extract high political and economist costs.

...

Congress Chairperson Sonia Gandhi must realise the importance of fiscal sensibilities. Or else even the liberal dose of higher spending on social safety net programmes will not be able to ensure a political win if the economy is plagued with persistently high inflation and suffers a fiscal blowout that cripples investor confidence and economic growth. The choices in the Budget are clear. So are the respective outcomes.

This article was published in the Business Standard on Saturday, February 12, 2011. Please read the original article here.
Tags- Find more articles on - deficit | Finance | minister

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