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Wanted: Budget With Equitable Burden Sharing - Outside View by S.S. TARAPORE
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Wanted: Budget With Equitable Burden Sharing
Feb 28, 2013

The Budget for 2013-14 is the last Budget before the General Elections. The Finance Minister, Mr. P. Chidambaram, faces a daunting task of producing a Budget against a backdrop of several macroeconomic challenges which call for significant adjustments: The balance of payments current account deficit of around 5 per cent of GDP can damage India's international rating and needs to be brought down quickly to 3 per cent.

The consumer inflation rate of 10.8 per cent is causing social tensions and needs to be reduced to the tolerable level of 5 per cent. There is a need to revive the growth rate from its current level of 5.0-5.5 per cent to, say, 6.0-6.5 per cent. The gross fiscal deficit (GFD) of the Centre of 5.3 per cent of GDP is far too high and a phased adjustment over the next few years to 3 per cent is necessary. Household sector financial savings have fallen precipitously from 12.9 per cent of GDP in 2009-10 to 7.8 per cent in 2011-12 and urgent steps are necessary to increase financial savings.

The pain of adjustment should be equitably shared by all segments of society. The Finance Minister is a seasoned veteran of many battles but today he faces the ultimate ordeal by fire.

Fiscal Deficit in 2013-14

While the conventional focus is on the gross fiscal deficit (GFD)-GDP ratio and the objective is to reduce it to 4.8 per cent in 2013-14, this indicator can be misleading as small variations in the GDP can have a sizable impact on this ratio. A better indicator of the fiscal adjustment would be the extent of reduction in the GFD-Total Expenditure ratio. As per the Budget for 2012-13 this ratio was as high as 34.4 per cent. Such a large resources gap is clearly unsustainable and in 2013-14 a sharp reduction in this ratio is necessary.

Reducing the fiscal deficit by selling the family silver (PSU sales of equity) and higher transfer of profits of public sector units, principally the Reserve Bank of India, would tantamount to window dressing. As such the quality of fiscal adjustment is as important as its size.

Rationalising Subsidies

In the case of food grains there is the question of public sector stocks rotting while government continues to bear the cost of storage. Provision of free food grains to the genuinely starving segments of society is a moral obligation and it would be unconscionable to criticise the feeding of the distressed as populist wastage of resources. There is merit in balancing social obligations with financial prudence in devising the ambitious Food Security Safety Net.

The petroleum subsidies are admittedly high.

The petroleum subsidies are admittedly high. While diesel and kerosene subsidies have been put on a well calibrated reduction, the subsidy on Liquefied Petroleum Gas (LPG), for cooking fuel, of Rs 32,000 crore has gone through an agonising flip-flop. The present proposal of a unified non-subsidised price has merit, in that a black market is eliminated. This, however, necessitates a transitional subsidy to all consumers which will increase the overall burden of subsidies. If there is a series of calibrated increases in the LPG price, each of say Rs 50 per cylinder, and the subsidy is given only to the weakest element, there would be progressive reduction in the overall LPG subsidy. Unless the FM sets out an unequivocal policy change on the LPG subsidy, there would be a large open-ended drain on the Budget.

Relief for Income Tax Payers

With the crippling inflation of recent years, the Budget for 2013-14 should provide relief for income tax payers in the income bracket up to Rs 5 lakh. The FM could consider the restoration of standard deduction for salaried earners (by say Rs 30,000), enhance the 80 C deduction ( by say Rs 50,000), ease the tax rates for senior citizens by a gradual increase with age (say from the age of 70 years rather than 80 years at present). Again, the enhancement of the exemption for Savings Bank interest from Rs 10,000 to Rs 20,000, inclusive of interest on fixed deposits would be a reasonable measure. The most equitable measure would be the increase in the basic exemption of Rs 200,000 to say Rs 220,000, with corresponding increases for senior citizens.

Taxing the Super-Rich

The FM and Dr. C.Rangarajan had mooted the idea of an Inheritance Act and more generally whether the super-rich should also bear a part of the pain of fiscal adjustment. India Inc., supported by a number of analysts of repute, have been up in arms that anything which raises the burden on the super-rich will affect the 'sentiment' and will dampen the recovery of the economy. The present system of taxation lacks distributive justice and reinforces the Thrasymachus doctrine that 'justice is the interest of the stronger'- rejected by Socrates in Plato's Republic. There are a number of glaring areas where there are undue benefits for the super-rich. The question is would the FM be able to take some of the following measures: (i) Raise the maximum income tax rate from 30 per cent to 35 per cent for incomes over Rs 20 lakh or at least impose a 10 per cent surcharge on these incomes. (ii) Impose long-term capital gains tax on stock market transactions and also tax short-term capital gains at the same rate as other income, while withdrawing the Securities Transaction Tax. (iii) The total exemption of dividends from income tax is a fiscal atrocity; in this context there is a case for increasing the dividend distribution tax from 15 per cent to 20 per cent (plus additional surcharges). (iv) Tighten the Wealth and Gift Tax regime. (vi) Announce an in principle decision to introduce an Inheritance Tax and the modalities could be worked out in a month or two. If none of these measures is taken, it would reflect the oligarchic nature of our polity.


Implementing the main recommendations of the RBI Report of the Working Group on Gold would be a strong signal. The setting up of the Gold Corporation of India (Gold Bank) and specific measures to activate idle gold hoards would reduce gold imports. Any further increase in the gold import duty will result in illicit imports. Creating new financial instruments such as Indexed Bonds (with capital and interest indexation) and gold related bonds would be salutary measures. Unless household sector financial savings are revived, we can bid good bye to a higher growth rate.

The Fiscal Cross Road

The Budget of 2013-14 will be a watershed akin to the 1991 and 1992 Budgets. The electorate would assess whether we are a just state or an oligarchy.

Please Note: This article is exclusive to The Freepress Journal and was first published on February 28, 2013.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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