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Budget Tidings

THE NEED FOR fiscal consolidation has been a constant requirement and in this budget season it is back on centre stage. Reform of the tax system including the toning up of the administration has been another recurrent consideration. This year that has been in sharp focus with the release, in December last, of the final reports of the two high-level task forces on direct and indirect taxes. The Kelkar recommendations are expected to leave their imprint on the policies concerning both direct and indirect taxes in ways that go well beyond mere tinkering with the rate structures. Finally, in the reform era, every Finance Minister has in his budget speech highlighted policy changes even those that did not have an immediate fiscal significance. It is almost certain that this time too the Finance Minister will announce major institution-building measures aimed at strengthening the financial sector and alleviating the negative impact of the failed monsoons. Needless to add, all the above core issues are both interrelated and central to not just the fiscal policy but to macroeconomic policy as a whole.

Correcting the fiscal imbalance by reining in the deficits is as much a task of the reform agenda as it is of a prudent fiscal policy. The two-pronged approach here, of augmenting revenues and controlling expenditure, has not been wholly successful over the years, with the level of deficit continuing to be around 5.7 per cent of the GDP as of last year. The increasing and persistent revenue deficit (around 3.4 per cent), fuelled mainly by the rising revenue expenditure, has been the principal cause. The latter has been as high as 12-14 per cent of the GDP during the 1990s. Any pruning of total Government expenditure has unfortunately come at the expense of capital expenditure with its serious consequences on social sector and infrastructure development. It has been well documented, for instance, that inadequate public spending in the reform era has had an adverse impact on critical infrastructure sectors such as power, ports, roads and railways. The problem has become especially serious in the context of the failure of the private sector to build capacities. Also well recognised have been the other consequences of the yawning deficit, which can threaten macroeconomic stability, increase the savings- investment gap and threaten economic growth. For instance, a major part of the increase in private savings has gone to finance the fiscal deficit and Government borrowing has crowded out private investment.

Such a context strongly suggests that the Government will pay more than lip service to what has been the most hotly discussed fiscal topic, the Kelkar recommendations. The focus of those recommendations has been on simplicity and improved tax administration. The consultative papers released by the task force were debated at length and the one on personal income taxes widely criticised for being harsh on the middle class. However, even the final version retains the original thrust even while suggesting a few sops. The attention will now shift to whether the Government will muster the necessary political will to implement the proposals as a package and not just in personal income taxes but also in indirect and corporate taxes. A milestone is set to be reached in indirect taxes with the scheduled implementation of a VAT regime across all States and the Centre agreeing to meet any shortfall in the initial years.

Among the policy announcements that are expected, there could be a few on institution building in the financial sector. The financial implications of the UTI package will be quantified. A charter for reviving the IDBI is almost certain. The implementation of the recently passed competition law through setting up a Competition Commission is also likely to figure. In the end, it is seen that the budget exercise of today is really about orchestrating several interconnected action points, even if some of those do not have an immediate fiscal significance.

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