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Millennium Post

FM plans painless fiscal surgery

A rejigging of the current three-tier income-tax apparatus, small tax concession for income up to Rs 10 lakh, new tax slab for high-income group, selective tax on dividend income, introduction of inheritance tax, tax sop on savings, small changes in excise and customs levies, minor export concessions, further government stake sale in state undertakings (PSUs), simplification of rules for foreign direct investors (FDI), tightening of expenditure and strengthening of tax collection machinery are among the options Union Finance Minister Palaniappan Chidambaram may consider for his 2013-2014 budget proposals.

The forthcoming budget, as the finance minister had already indicated, will be an exercise to strike a balance between public expectations and fiscal compulsions to put the economy back on a forward gear. India’s growth story took a severe beating in 2012. The GDP growth rate slumped to around five per cent against the projected nine per cent. The scope for making the coming budget – to be the last before the next parliamentary election – populist is extremely limited. Yet, the budget is expected to be friendly to the vocal salaried class and the low and middle income group though main focus areas will be higher savings and investment, control of inflation and public expenditure, policy and procedural reform and growth. Given the current situation of the economy, crippled by large fiscal deficit, uncomfortably high current account deficit, heavy subsidy burden and continuing retail price inflation, the finance minister does not have much elbow room to indulge in pre-poll financial profligacy or populism. Instead, he is under pressure to ensure fiscal consolidation by raising income, drastically cutting the pending plan and non-plan expenditure for 2013-2014 and making better and more productive use of government revenue, improving the performance of the export sector, tightening import of unproductive assets such as gold, silver and platinum, restricting subsidies and making better use of them, attracting more FDI, containing inflation and protecting the exchange value of Rupee. By all means, it is an uphill task even for Chidambaram, who is regarded as one of the country’s best managers of public fund.

 The present income-tax slabs, a Chidambaram invention in 1997, which made him a darling among India’s post-reform new generation tax payers and helped many hard working domestic businessmen aggressively intrude into the exclusive global dollar-billionaire league, has remained unchanged for 15 years.

More benevolent billionaire businessmen such as Wipro’s Azim Premji do not mind paying a little higher level of income-tax to the government. This opens an opportunity before the finance minister to create a special income slab of say Rs 50 lakh and beyond per annum to collect a new higher rate of income-tax at around 35 per cent. A small levy of say five per cent tax on dividend income of Rs 10 lakh and above is unlikely to be grumbled upon by the high income group. Much depends upon the result of the finance minister’s interaction with heads of industry and commerce associations and separate dialogue with the country’s top business leaders.

 On the expenditure side, the size of the total budget for 2013-2014 is expected to exceed Rs 16,00,000 crore. The government will be under severe pressure to raise revenue from every possible source. The pressure can be eased only by a much higher level of economic growth, which will require higher levels of savings and investment. Therefore, the forthcoming budget’s key objective is to achieve higher economic growth. This will automatically lead to higher income and revenue generation and lower fiscal deficit. The finance minister appears to be confident about compressing fiscal deficit during both this fiscal and next financial year.

The ministry has been working on a war footing since January to contain the fiscal deficit for 2012-2013 within the revised target of 5.3 per cent of the GDP. The last quarter budget allocations to various departments have been pruned. The original fiscal deficit target was 5.1 per cent as against 5.8 per cent in 2011-2012.

The total direct tax collection in the first 10 months, till 31 January, rose by only seven per cent against the targeted 14 per cent. It was Rs 4.55 lakh crore – only Rs 30,000 crore more than the corresponding level in 2011-2012. The trade deficit may exceed $110 billion during 2012-2013 despite a fall in gold import. Last fiscal, India imported $57 billion worth of gold. During April-December 2012, the country spent $38 billion on gold import. Fortunately, India’s foreign exchange reserve looks comfortable for the present hovering at close to $300 billion.

 The large current account deficit – 5.7 per cent of the GDP till 31 December as against maximum advisable limit of 3.5 per cent – is a real concern. There is no easy solution to the problem. The remittances from Indians working abroad have already reached a high level. The Indian economy is highly import-led with fuel (petroleum and coal), fertiliser and food (edible oil) comprising the biggest import bill. The import pattern is not going to change too soon. The fiscal deficit is continuously growing.

So far, the country has been able to finance the deficit through FDI inflow into the primary market, foreign institutional institution (FII) investment in the secondary market and external commercial borrowings (ECB) without dipping deep into its foreign exchange reserves. This explains why the higher flow of FDI with regularity and a reasonably bullish stock market are so important to the economy. Chidambaram is expected to make the coming budget more foreign investment – FDI and FII – friendly.
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