In India, the Union Budget is not only a statement of fact but also a statement of hope. The Union Budget 2012 will be closely watched, given the background of slower growth in the economy led by global uncertainty.

The country had seen a growth rate of 6.1 per cent in the recent quarter and is witnessing a clear investment-led slowdown in the economy.

This is the last chance for the Government to come out with a reformist budget, ahead of the general elections in 2014. However, the setback to the ruling party in the recent State Elections could result in the Finance Minister focusing more on populist policies.

The fiscal deficit is expected to remain above 5.5 per cent this year and with the global slowdown it could continue to remain above 5 per cent next year as well.

With this background, the Union Budget for this year has greater relevance and importance in determining the course of the economy in the near future.

In my opinion, the Finance Minister should focus on the following in Budget 2012:

Capital expenditure

The capital expenditure to total expenditure which is a measure of capital spend by the Government, fell from 18 per cent during fiscal 2001-2008 to 13 per cent in fiscal 2012. At the same time, the Government increased its borrowings, crowding the private sector's borrowing. What this means is that the Government spent less on capital expenditure while bloating non-Plan revenue expenditure. This trend needs to be reversed.

Subsidies

The subsidy expenditure as a percentage of total receipts of the Government increased from 13 per cent in fiscal 2001-08 to 30 per cent in fiscal 2012. With the Government talking about the “Right to Food Act”, this subsidy bill can only go up further.

Also, the Government grossly under-estimated their subsidy bill in the Budget and the final subsidy bill for the year may well be much higher than the budgeted amount. There is a clear need for the Government to prune subsidies, target them to the needy, cut down waste and make sure not to fall into temptation of being populist and bloat the subsidy bill even more.

There are several big ticket reforms which are stuck at various stages. The major ones are GST, DTC, the New Companies Bill, etc. GST is one reform which will create a common market and transform the country. However, there is no clear timeline for implementation of any of these reforms.

We all understand that it takes time for the Government to build consensus and implement reforms; however, the country expects a clear timeline and comfort on pushing through some of these.

Remove tax sops

The total tax revenue foregone by the Government for fiscal 2010 and 2011 were Rs 4,82,432 crore and Rs 5,11,630 crore respectively. Of that, around Rs 72,881 crore and Rs 88,263 crore is basically due to corporate income tax.

A country with such a high distortion in income levels cannot afford to have such a huge amount of tax incentives available to its corporates.

The DTC was aimed at removing these distortions and simplify the tax laws. While the DTC may take some time to implement, I think the Government should take steps to remove all these tax incentives which will help them to focus on fiscal consolidation. While doing this, the Government should also reduce the corporate tax rate by removing all surcharges applicable on the basic tax rates.

Tax disputes

Today, the process of settling tax litigation is onerous and time-consuming. There is no accountability in the tax system for making frivolous demands. This has resulted in crores of rupees pending as tax arrears for the Government. The DRP is a good step in that direction but it needs more strengthening and independence.

Indirect taxes

With inflation so high and economic growth declining, there is a need to reduce (or, at least, resist the temptation to increase) any indirect taxes. This will make sure there is enough disposable income in the hands of the citizens which could, in turn, propel consumption and thereby aid growth.

In short, all we need is a pro-reformist, pro-growth and pro-investment Budget which will put the country on high growth trajectory.

Related Topics