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BW Businessworld

Mr Jaitley’s Constraints - And How To Break Them

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In the previous issue, I had suggested that the Finance Minister (FM) might wish to focus on a few items for his first Union Budget. These were under three broad heads — giving the right reform signals, slashing expenditure and raising non-tax revenues.

Under the first, I had advocated eliminating the retrospective tax law brought in the 2012-13 budget; getting rid of the dividend distribution tax (DDT); reducing the surcharge on income tax with a statement that it would soon be removed; and a promise to introduce the Goods and Services Tax by 2014-15. Under the second, I had made a case for reducing fertiliser, food and fuel subsidies. Regarding the third, I showed how systematic disinvestment of 10 listed banks and nine public sector undertaking could generate significant non-tax revenues over the next two to three years.

Having said so, the FM’s maiden appearance will be on a horrible, badly cracked and crumbling pitch. The fiscal scenario left by UPA-II reminds me of the beast of a pitch at the Chinnaswamy stadium in Bangalore on 17 March 1987, when Sunil Gavaskar battled against Iqbal Qasim and Tausif Ahmed with half a dozen Pakistanis at close catching positions.

Consider net tax revenues to the centre. In Mr Chidambaram’s interim budget for 2014-15, despite the revised estimate (RE) of net tax revenues for 2013-14 being 5 per cent lower than the budget estimate (BE), it was upped for 2014-15 by 11.5 per cent over 2013-14 (BE) and by 18 per cent over 2013-14 (RE). It can’t happen. This year, tax revenues won’t grow faster than nominal GDP, or around 14 per cent. Thus, a more realistic projection is in the region of Rs 953,000 crore, or a revenue shortfall of some Rs 33,500 crore, which will knock off 25 basis points from the interim budget’s fiscal deficit target of 4.1 per cent of GDP.

After a partial rollback of railway fares, I am not sure that an inflation-wary government will have the stomach to sharply cut subsidies on fertiliser and petroleum products, especially on LPG — a huge handout to the disproportionately vocal middle class. Moreover, if crude oil prices continue rising, it would need a tough government to continue with decontrolled pricing that regularly passes on higher diesel and petroleum prices to consumers.

Even if we ignore the Food Security Act, a poor monsoon may come in the way of significantly cutting food subsidies. This is a terrible head of expenditure because less than half of what is allocated is actually spent on giving subsidised food to the poor; and yet, woe betide those who wish to reduce it. Regarding fertiliser subsidies, the negative effects of rising crude oil prices and unpaid dues to urea manufacturers may prevent sharp cuts.

Thus, it is back to the drawing board. What can the FM do? He can honestly show that the interim budget’s fiscal deficit target of 4.1 per cent of GDP was hogwash. And then try to keep it at around 4.7 to 4.8 per cent, while announcing major policy reforms. Among which should be getting rid of retrospective taxes and the DDT; substantially increasing the take from disinvestments, with one bank or public sector company’s stake sale coming up each month; and using IT to expand the direct tax base. With one more reform: getting the revenue department to settle long-standing tax litigations, so that some of the Rs 4.7 lakh crore stuck in the process gets released for the coffers. Do you know that tax disputes involving Rs 25 lakh or more can be dragged by the government to the Supreme Court? Surely, it is a waste of effort and money. Better to settle, as any sensible Gujarati would say.

Thus, the FM should outline time-bound reforms; state a realistic fiscal deficit target; produce some good news and lift animal spirits; go full tilt at greater disinvestment; and give some tough messages. And maybe, unlike Gavaskar, he can score a century and win the Test as well. Fingers crossed. Firmly.

(This story was published in BW | Businessworld Issue Dated 28-07-2014)