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| Budgeting in difficult times | | A reform package will beat any stimulus package |
| Business Standard / New Delhi Jun 12, 2009, 00:54 IST |
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The finance minister has an unenviable task. After years of buoyant revenues, Mr Mukherjee faces the once familiar challenge of squaring the fiscal circle. He let the fiscal deficit slip last year, and no one complained in the crisis environment of October-March. Now, informed observers will look for some kind of re-balancing as reassurance that the fisc will be pushed back on to even keel, in stages. At the same time, expectations from the new government are high. A whole range of promises have been made during the elections, and some of them come with large price tags—at a time when the fiscal deficit is already too high for comfort. The Planning Commission is naturally pushing for more spending, and the various infrastructure sectors cry out for more allocations to be made. It would be politically risky to present a Budget that is not influenced by these expectations, and economically risky to not attempt some fiscal rectitude.
On the revenue side, several tax concessions have been given in an effort to battle the economic slowdown—the cenvat rate has been dropped from 14 per cent to 8 per cent, and the service tax rate from 12 per cent to 10 per cent. The key question would be when these can be rolled back up. It may seem too early just yet, since the slowdown has not ended. Indeed, exporters would be looking to Mr Mukherjee for help to cope with the sharp downturn in exports. But postponing the reversal of the tax cuts cannot be done for too long, among other things because an integrated goods and services tax is scheduled to be introduced next year. This will need to be done at a realistic rate—perhaps 16 per cent, though that seems impossible to attempt in the current business environment. Given all the constraints, it would be best for the finance minister to use this year’s Budget to announce the rate for next year, and to outline a roadmap of how he intends to get from where the rates are now to the end-point, so that industry knows what the plan looks like and can get ready for it.
The only easy way of closing the gap between revenue constraints and the expectations with regard to spending initiatives would be to undertake serious disinvestment. It should not be impossible to sell shares in state-owned enterprises so as to raise anything up to 1 per cent of GDP, or over Rs 50,000 crore. Such a step would throw fresh paper into the market when stock prices have gone too high too quickly, and it would also attract fresh foreign money at a time of yawning trade deficits.
It would be a good idea to attempt some simplification, through a scrapping of the fringe benefit tax, which has turned into exactly what it was not supposed to be—a tax on genuine business transactions. The securities transactions tax too needs to be scrapped, and should really be replaced with the long-term capital gains tax that was abolished when the STT was introduced. It is unconscionable that people should make fortunes through stock investments, and pay no tax at all other than a nominal turnover tax. However, given the level of fiscal stress that exists, perhaps both steps need to be postponed till next year. Among other things, the re-introduction of a long-term capital gains tax could end up unsettling the stock market, which a new government would want to avoid.
There is talk of a fresh stimulus package being announced as a part of the Budget. Given the fact that the worst of the slowdown is now over, and that some of the earlier stimulus announcements have either not been implemented or had little impact, this is not a road down which the finance minister should travel. It should be clear to him that what will raise confidence levels about the future and thereby encourage more consumption spending as well as more investment, is the announcement of a robust reform package. That would reinforce the belief that this is a more reform-minded government than the last one. A proper set of reform measures will do more than what any stimulus package can, as will a lowering of interest rates by the banks whose chairmen Mr Mukherjee met on Wednesday. In short, a Budget that delivers on disinvestment while outlining a strong reform agenda, buttressed by falling interest rates, will do enough to make people gloss over challenging fiscal arithmetic.
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