What the broad thrust of the budget should be like?

The economists are making a suggestion that the budget has to focus on building the investors confidence and bringing the focus back to the India growth story, which is lost. They repeatedly said that the investment cycle is declining, the private investment is not happening and therefore, budget will have to become instrument of restoring confidence in investors.

They have given three suggestions; one is that the finance minister has to undertake fiscal consolidation because the rising fiscal deficit is causing lot of nervousness and it is also not preventing the inflation from being managed. Secondly, the tax-GDP ratio is declining; the rate of growth has declined too. It is not just cyclical but there are structural factors and therefore, steps must be taken to raise the direct tax collection because only 10,000 people are declaring above Rs 10 crore.

A lot of evaluation is happening through the agricultural income root. So, economists have been suggesting to try and plug that and raise the direct tax collection. Finally, if the tax revenues are not sufficient, then you need to have non-tax measures like privatization. And if the stock market does not permit that, then you should use the option of finding the strategic investors to try and raise revenue on that account.

There was also a suggestion on the expenditure side, about cutting subsidies and decontrolling diesel price. One suggestion was little different that if you can’t decontrol diesel price, then at least you could raise its revenue by charging a high excise duty on diesel cars, so that those who are getting a disadvantage, will at least pay to the government.

You spoke about fiscal consolidation. You are aware that in the West, there is a huge debate going on whether the austerity measures should be brought in at the time of declining growth or it is counter-productive. You do austerity; bring down tax revenues and your fiscal problems become worse in some ways. Does that debate apply to India this time?

Our growth rate is not down because consumption demand is down; our growth rate is down because our investment demand has taken a real beating. So, the government should improve the investment sentiment and attract investment back from the private sector and from abroad. For that to happen, what you need is the assurance that the micro-economic stability is maintained. And this is not contradictory to achieving greater investment demand if you take the reform step; structural reform steps that are necessary for it.

For example, people today talked about an accelerated depreciation rate or if some investment allowance can be brought back. We see things like a beleaguered industry like aviation being given infrastructure status or power generating sector being given the tax relief under section 81A, which has ended into 31 March 2011. But a number of us felt that it should have been extended for six years.

So, getting the growth back is not a tradeoff, it is not contradictory to achieving fiscal consolidation. In fact, I would argue that at this point of time, achieving rates of fiscal consolidation would be a stimulus to investment rather than the other way round.

Are any major changes being anticipated on the tax side?

There is the shift to the negative list on the services tax from the positive list and that will add the significant collection to the services tax and that is a necessary part of a GST package. However, that is only factor that we could see that was suggested by the economists. As I said, it will perhaps be included in the coming budget as it will also give the finance minister much needed revenues from the service sector.

What were the suggestions made on the government expenditure on the subsidy side?

There was of course a fair bit of conversation on rationalizing public expenditure and on making sure that you get a better bank for buck by making expenditure reforms that are necessary and also to cut down subsidies that are running up and down and not to take steps which will further inherence the subsidy bill.

One of the steps that was suggested by them was to actually take control of the entire PDS system at the minimum support price because it was pointed out that we had a situation of rising food stocks and prices and that is because the way we procure our food and the amount we spend on it. So why don’t we replace it with conditional transfers, etc, which will make this whole system much better rather than the current situation?

Do you prefer a quiet budget or a big bang one?

It is very important to restore the credibility of the government this time and therefore, the economists suggested several measures which do not require any legislative effort. For example, you can notify the multi-brand FDI, you can actually bring to some of the projects to closure that have been hanging for a long time. These are steps which are real, practical and can be taken. So, we need a budget which shows a real intent of implementation on a solid ground.

Source: NDTV, India,  dated 04/02/2012