Wishing all the readers a very happy new year! I hope that the year will
usher in reforms to lift the pall of gloom that pervades the industry
and business community. Given that the elections in five states will go
on until the beginning of March, the reform initiatives can come only in
the presentation of the budget in early March.
This year’s budget is likely to be a low-key affair as the cacophony of the elections in five states will take all the attention. Of course, like in other years, there will be hopes and speculations on what reforms the budget will bring in. Given the prevailing gloomy business environment, it is important for the government to use the occasion to lift the gloom. In fact, this is an opportunity to prove that the government is still in the business of reforms. With elections to five state governments and the general elections slated only in 2014, the government has a short window to embark on serious reforms before the election fever grips again. The initiative for the revival should begin with the budget of 2012-13, and this is the last chance for the government to demonstrate that it really means business. This would, however, require the government to have a clear direction on reforms.
The first important thing is to lay out a detailed plan for fiscal consolidation through a revised Fiscal Responsibility and Budget Management Act, which should not merely lay down the road map but also undertake measures to make the process transparent, comprehensive, sensitive to exogenous shocks and institute a system of monitoring and compliance to make it a commitment rather than a mere intent. Surely, 2011-12 is a year of missed opportunities and there were significant slippages on the fiscal deficit target. To begin with, it was unrealistic to target the fiscal deficit to decline from 5.1% of GDP in 2010-11 (RE) to 4.6% by assuming that non-interest expenditures would increase by just 1.4% without any credible strategy and action plan. Unfortunately for the government, the deceleration in the growth rate and continued rise in prices only added to the woes.
The proliferation of subsidies and transfers, together with deceleration in the growth of tax revenues due to the slowdown in the economy and the inability of the government to realise revenues from disinvestment, have constrained the fiscal consolidation process. It is now expected that the fiscal deficit could be as high as 5.5% of GDP, which is almost half a percentage point higher than the previous year. Reducing the fiscal deficit to 4.2% of GDP in 2012-13 as recommended by the Finance Commission will be a herculean task, particularly at a time when there are additional spending commitments on food security and Sarva Shiksha Madhyamik Abhiyan.
Returning to the path of fiscal consolidation is surely a daunting task and the finance minister will have to employ all his ingenuity, which should begin in the budget of 2012-13. Two major initiatives on the revenue side could be the expansion of the service tax base and the enactment of the direct taxes code (DTC). On the service tax, the two discussion papers released for public discussion this year brings in the hope that this overdue reform will be undertaken. Rather than continuing with the positive list of more than 100 services, the new approach seeks to tax all services with a small list of services exempted. This could expand the tax base significantly, reduce the clamour for non-inclusion, facilitate the introduction of goods and services tax (GST) and minimise litigations. The government has already put out two discussion papers in public domain and moving ahead on this front is feasible. If the negative list is kept to the minimum, with input tax credit generalised for both goods and services, this would, in effect, bring in a GST at the manufacturing stage even without constitutional amendments. In fact, it would also be useful to rationalise the excise duties by converting the specific duties into ad valorem and unifying the rates by moving up the items taxed at lower rates. Surely, items like cement could be taxed at an ad valorem rate and there is no need to tax processed food like breakfast cereals at a lower rate. In addition, the finance minister will do well to revisit the tax on tobacco products, which is low by international standards. Besides revenue, increasing taxes on tobacco products can save many lives.
As far as DTC is concerned, the Parliament’s Standing Committee on Finance is likely to clear the DTC Bill sometime in January, and if the CBDT can expeditiously get the notifications ready, it is possible to implement it from April 2012. This could help in expanding the tax base and, more importantly, help to bring in clarity to the statute. Specifically, provisions non-profit organisations, introduction of wealth tax and provisions relating to transfer pricing could increase the tax base and revenue productivity.
In addition to these signals, as the price situation cools off, the Reserve Bank of India should reduce the policy rates. The two other initiatives that are feasible and should be undertaken are the decontrol of diesel prices and allowing the entry of multi-brand retail. The former is important to reduce subsidy outlay, prevent distortions and for environmental reasons. In addition to these, the government should also increase the price of urea as well as kerosene and cooking gas even if as a transitory measure to contain subsidies. It can also introduce pilots on targeting of subsidies in some states using the UID card.
After the elections in the five states, political landscape is likely to become clearer as both the DMK and the Trinamool Congress will need the Congress party more than the other way around. With a clearer political landscape, the time will also be ripe for enabling the entry of multi-brand retail. Most importantly, the latter should have a clearer vision of reforms and should unite in its pursuit, if they do not want to be totally marginalised in the Indian political landscape. As 2011 comes to a close, it is the hope that the government will realise the imperatives and make use of the short window of opportunity it has to pursue the reforms.
This year’s budget is likely to be a low-key affair as the cacophony of the elections in five states will take all the attention. Of course, like in other years, there will be hopes and speculations on what reforms the budget will bring in. Given the prevailing gloomy business environment, it is important for the government to use the occasion to lift the gloom. In fact, this is an opportunity to prove that the government is still in the business of reforms. With elections to five state governments and the general elections slated only in 2014, the government has a short window to embark on serious reforms before the election fever grips again. The initiative for the revival should begin with the budget of 2012-13, and this is the last chance for the government to demonstrate that it really means business. This would, however, require the government to have a clear direction on reforms.
The first important thing is to lay out a detailed plan for fiscal consolidation through a revised Fiscal Responsibility and Budget Management Act, which should not merely lay down the road map but also undertake measures to make the process transparent, comprehensive, sensitive to exogenous shocks and institute a system of monitoring and compliance to make it a commitment rather than a mere intent. Surely, 2011-12 is a year of missed opportunities and there were significant slippages on the fiscal deficit target. To begin with, it was unrealistic to target the fiscal deficit to decline from 5.1% of GDP in 2010-11 (RE) to 4.6% by assuming that non-interest expenditures would increase by just 1.4% without any credible strategy and action plan. Unfortunately for the government, the deceleration in the growth rate and continued rise in prices only added to the woes.
The proliferation of subsidies and transfers, together with deceleration in the growth of tax revenues due to the slowdown in the economy and the inability of the government to realise revenues from disinvestment, have constrained the fiscal consolidation process. It is now expected that the fiscal deficit could be as high as 5.5% of GDP, which is almost half a percentage point higher than the previous year. Reducing the fiscal deficit to 4.2% of GDP in 2012-13 as recommended by the Finance Commission will be a herculean task, particularly at a time when there are additional spending commitments on food security and Sarva Shiksha Madhyamik Abhiyan.
Returning to the path of fiscal consolidation is surely a daunting task and the finance minister will have to employ all his ingenuity, which should begin in the budget of 2012-13. Two major initiatives on the revenue side could be the expansion of the service tax base and the enactment of the direct taxes code (DTC). On the service tax, the two discussion papers released for public discussion this year brings in the hope that this overdue reform will be undertaken. Rather than continuing with the positive list of more than 100 services, the new approach seeks to tax all services with a small list of services exempted. This could expand the tax base significantly, reduce the clamour for non-inclusion, facilitate the introduction of goods and services tax (GST) and minimise litigations. The government has already put out two discussion papers in public domain and moving ahead on this front is feasible. If the negative list is kept to the minimum, with input tax credit generalised for both goods and services, this would, in effect, bring in a GST at the manufacturing stage even without constitutional amendments. In fact, it would also be useful to rationalise the excise duties by converting the specific duties into ad valorem and unifying the rates by moving up the items taxed at lower rates. Surely, items like cement could be taxed at an ad valorem rate and there is no need to tax processed food like breakfast cereals at a lower rate. In addition, the finance minister will do well to revisit the tax on tobacco products, which is low by international standards. Besides revenue, increasing taxes on tobacco products can save many lives.
As far as DTC is concerned, the Parliament’s Standing Committee on Finance is likely to clear the DTC Bill sometime in January, and if the CBDT can expeditiously get the notifications ready, it is possible to implement it from April 2012. This could help in expanding the tax base and, more importantly, help to bring in clarity to the statute. Specifically, provisions non-profit organisations, introduction of wealth tax and provisions relating to transfer pricing could increase the tax base and revenue productivity.
In addition to these signals, as the price situation cools off, the Reserve Bank of India should reduce the policy rates. The two other initiatives that are feasible and should be undertaken are the decontrol of diesel prices and allowing the entry of multi-brand retail. The former is important to reduce subsidy outlay, prevent distortions and for environmental reasons. In addition to these, the government should also increase the price of urea as well as kerosene and cooking gas even if as a transitory measure to contain subsidies. It can also introduce pilots on targeting of subsidies in some states using the UID card.
After the elections in the five states, political landscape is likely to become clearer as both the DMK and the Trinamool Congress will need the Congress party more than the other way around. With a clearer political landscape, the time will also be ripe for enabling the entry of multi-brand retail. Most importantly, the latter should have a clearer vision of reforms and should unite in its pursuit, if they do not want to be totally marginalised in the Indian political landscape. As 2011 comes to a close, it is the hope that the government will realise the imperatives and make use of the short window of opportunity it has to pursue the reforms.
( M GOVINDA RAO, NIPFP in Financial Express, 3 January, 2012)
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