Fiscally, Pranab Mukherjee’s first Budget for UPA II should be measured on three things. First, whether he effectively recognises that FRBM has been subverted and, therefore, proposes new targets. This is not a question of fiscal fundamentalism. It is simply a matter of restating India’s commitment to fiscal responsibility after UPA I took too many liberties with FRBM I. There are two broad issues for FRBM II. One, should off-Budget items be incorporated and, second, should fiscal targeting be made sensitive to short-term economic growth fluctuations. The right, academic and easy answer to both is ‘yes’. But politics is another thing. Incorporating off-Budget items in deficit calculations for a new government’s first Budget and to do so when oil prices are rising—which means more fuel and fertiliser subsidies—would either mean dangerous fiscal numbers or subsidy reform. Tough call for Mukherjee and the Congress. But if they don’t do it in the first year, it will get tougher in future. As for the second issue, the practical formulas for making fiscal targeting sensitive to growth fluctuations—more leeway in slowdown, for example—will require inventive thinking. One is not sure whether North Block is thinking along these lines. But again, this is the best time to do it, when a new government has just come in and when the economy is clearly in the midst of a cycle.
The second criterion for assessing Mukherjee will be his approach to indirect taxes. As usual, all the pre-Budget excitement is about personal and corporate taxes. But India’s tax system stands at the threshold of a major reform in the field of indirect taxes. Mukherjee must make clear his target date for the goods & services tax—2010 or a postponement—and his indirect taxes should reflect this near-future reform. That is, no new complication should enter the tax system, and as far as possible, rates should be brought closer. Given that both allies
(DMK) and the opposition (BJP) have expressed fears about not getting compensated for
GST, Mukherjee can increase his credibility by saying something concrete about this. Chambers of commerce have supported a GST and have also asked for concessions—they should understand the incompatibility of their two wishes. The third criterion is simple: abolish or severely circumscribe bad taxes like FBT and don’t add any more arbitrary cess by giving them politically correct names.
Source :
Financial Express - Bombay, India, dated 18/06/2009
