Time For Serious Reform

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08 November, 2014

Shikha Singh, Assistant Professor (Economics), Lal Bahadur Shastri Institute of Mangement

The two basic objectives I believe of the Union Budget 2013 -2014 should be: Putting the Indian economy back on a higher growth trajectory of around 8 per cent and restoring fiscal prudence.

These two objectives may sound somewhat contradictory. As the theory would suggest, we should pursue a countercyclical fiscal policy, i.e., in a slowdown one should follow an expansionary fiscal policy to provide demand side stimulus to the economy. Thus argued, Union Budget should be expansionary to counter the ongoing slowdown manifest in the decline in growth rate to around 5.5 per cent - 5.8 per cent. However, the fiscal space is constrained. With slower growth, the revenue targets are difficult to meet. At the same time, public expenditure is sticky downwards. This is because most of the public expenditure is 'committed' in nature, e.g., interest payments and defence expenditures. Therefore, the Union Budget 2013-14 is all about balancing various, often conflicting, objectives.

The overriding emphasis has to be on boosting growth with a revenue deficit of maximum 1 per cent of GDP (I might be over ambitious here, yet it can be worked out). So, my tax proposals would be:

No tax sops /concessions to Industries. Such concessions have often distorted the incentive structure and have disincentivised entrepreneurial efficiency in the past. This would also reduce the scope of tax avoidance.

We should continue with 3 slabs for income tax. However, the exemption limit could be raised to 2.50 lakhs. This is hoping for too much in a scenario where the government is trying to maximise its tax revenue. But, given the erosion in purchasing power due to sustained high inflation, it would be appropriate if the exemption limit is raised. As the Laffer Curve suggests, lowering tax rates can sometimes increase the tax revenue collections.
Moreover, the Govt. should rely on higher revenues through higher economic growth rate.
Greater incentives for savings are required. The deduction under section 80 of the Income Tax rate should be raised to 1.40-1.50 lakhs. Higher savings rate should translate in higher investment rate and thus boost growth rates.

Rationalising subsidies is the way for fiscal consolidation. Input subsidies in agriculture - fertilizer and electricity- needs to be reduced. Wasteful expenditure/subsidies, e.g., the transport subsidy scheme, need to be phased out quickly.

Capital expenditure should be given priority. One way to go about it is to utilize the proceeds from disinvestment specifically for public sector investment and/or retiring the public debt (particularly those attracting high interest rates).

Greater intent in making GST functional with a strict timeline to be achieved.

Emphasis has to be laid on devising a time-bound clearance mechanism for various investment proposals (be it in any sector like infrastructure, education etc.). This is very important for facilitating new investment & boosting investment levels.

Investment in improving supply chain of agricultural products. Supply- side factors have contributed largely to sticky inflation in last couple of years.

For industries, emphasis has to be on achieving the targets envisaged in the National Manufacturing Policy. Putting in place a speedy clearance mechanism is needed.
Investments need to be stepped up in infrastructure. Better infrastructure & efficient administration are the key to reduce the transaction costs.

Current account deficit has increased substantially in FY2012-13. While POL imports are demand inelastic, we may think of imposing additional cess on imports of gold.

There is a need to revisit the schemes in social sector, which have not been delivering. Studies by Programme Evaluation Office of the Planning Commission can be utilized to ascertain the relative efficiency and effectiveness of various Govt. schemes and programmes. Accordingly, less effective programmes can be restructured /merged with another programme to get maximum out of public expenditure in social sector.

G.L Sharma, Director, Lal Bahadur Shastri Institute of Mangement

G.L Sharma

The union budget will be presented soon now. The Finance Minister P Chidambaram is known for his bold, pragmatic and realistic budget presentations in the past. But this time the situation is quite different. The economic climate is depressing, globally, in many countries especially in the Middle East and many African countries. The home situation is gripped with widespread corruption, gradual economic slowdown largely due to inaction on the part of government machinery, misappropriation of natural resources and individualistic attitude of political parties have resulted in wide spread economic imbalances poverty and discontentment amongst the population. With this background, the finance minister must do hard home work and pay serious attention to the following:

Reduce the fiscal deficit substantially
Cut down wasteful expenditure
Introduce measures that would promote export
Reduce the input of consumption goods including petroleum products and oil
The present tax rates must be rationalised
The effort must be more to increase tax compliance and widen the base of tax payers
There is need to appoint a national commission to look into the entire subsidy system and rationalise them in such a manner that needy gets the benefit of subsidy.