A cruel joke

The finance minister relies on increase in taxes to narrow the fiscal deficit instead of a buoyant economy to boost revenue

By Mohan Sule

Countries respond to slowdown in two ways. The government reduces direct and indirect taxes and the central bank eases liquidity and interest rates. This was what happened after the credit-crunch contagion spread around the world following the collapse of Lehman Brothers in September 2008. These short-term fiscal and monetary measures boost sentiment as the environment allows resumption of risk-taking. How has the budget for 2012-13 fared when measured against these parameters? The finance minister’s challenge was to accelerate growth and at the same time be mindful of inflation. To kickstart the economy, he could have used the budget to roll out a second fiscal stimulus by offering still deeper excise and import duty cuts after those announced in 2009. The resultant expansion in economic activity could have boosted revenue, taking care of fiscal deficit. On the other side, he needed to cap if not trim social spending to tame inflation. Though the allocation to the resource-guzzling rural employment guarantee scheme has been scaled down, there is the food security bill waiting in the wings, Excise and service tax have been revised up 2% points and income tax slabs altered to bring marginal relief. Individual taxpayers will now have to wait for the Direct Taxes Code to kick in for deeper cuts. The is necessary to balance out the higher indirect levies incorporated in the imminent goods and services tax. The desperation in relying on revenue from higher taxes rather than from a buoyant economy is against the backdrop of fiscal deficit climbing upto 5.9% of GDP instead of the budgeted 4.6% in 2011-12.

The twin effect would boost prices of goods and services without a corresponding increase in the purchasing power of consumers, affecting private consumption: hardly the ingredients to revive the growth story. On the other hand, the finance minister kept all pending reforms, which could have attracted capital, created jobs and gone to meet growing demand, outside the purview of the budgetary provisions, mindful of the mercurial allies of the UPA government. A cruel joke, indeed. By doing so, the government has sent out the message that India has reverted to the pre-reforms era, which penalized the rich by higher taxes and viewed foreign investment with suspicion. Instead of lifting more population into the middle class by expanding the market, the government is content in giving subsidised food and fuels. In fact, non-plan expenditure is higher by 8.7% in the current fiscal over the revised estimate of last year mainly on account of subsidies, which would push up government borrowings and put pressure on interest rates, thereby triggering inflation. In a way, inflation could be good for the government. This would increase the nominal value of the GDP and, importantly, erode the debt burden. In fact, some apologists are already patting the UPA government for bringing down the debt to GDP ratio to 50.1 in 2011-12 as against 61.5 in 2004-05, when the first Congress-led coalition government was formed.

Similarly, the move to double the issuance of infrastructure bonds to Rs 60000 crore is a clever way for the government to take on off-balance-sheet debt just as the oil bonds that it issues to PSU refiners to partially compensate their underrecoveries. This will keep its interest payment to GDP ratio down despite higher borrowings from the market. The tax-free status gives these bonds a captive audience. A better way would have been to entice investors to the infrastructure sector by encouraging the mostly PSU issuers to become competitive, introducing transparency in the awarding of projects instead of favoring PSUs, clearing orders and payment quickly, removing restrictions on borrowers’ pricing of their products and services, and plugging leakages of allocations to public utilities. The inability to let go control of PSUs, resulting in increasing impatience of foreign institutional investors, and also the fear that the inflationary proposals in the budget could dim the attraction of equity markets have no doubt contributed to scaling down the divestment target by Rs 10000 crore for the current fiscal. Not that the finance minister has not realised the importance of a vibrant equity market to raise resources. The 50% tax deduction for investment up to Rs 50000 for first-time investors with income below Rs 10 lakh per annum under the Rajiv Gandhi Equity Savings Scheme underscores the government’s acknowledgement. This will create a ready receptacle for PSU share sale. Crucially, it gives investors control over their stock picks instead of relying on fund managers like in the equity-linked savings schemes. What could be a stronger indictment of the mutual fund industry’s failure to live up to the expectation of the small investors?

Mohan Sule