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Budget 2014-15: Nightmare or relief? - Outside View by S.S. TARAPORE

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Budget 2014-15: Nightmare or relief?
Jun 30, 2014

Need for fiscal correction without iniquity

The new government would present the regular Budget for 2014-15 on July 10, 2014. For attaining the broad objectives set out by the government, hard decisions will be required. In a milieu in which it is accepted that growth should be inclusive, there can be no justification for punitive measures on individual segments of society. A case in point being the recent hike in rail passenger fares for season ticket holders. In the metros, large numbers commute to work over long distances. A one-shot doubling of season tickets does not reflect well on a sensitive government (subsequently rolled back).

It is sometimes argued that, from a strategic viewpoint, it is better to take a sharp one-shot measure, rather than a series of gentle steps. Equally, the government has to recognise the dangers of social upheaval when punitive measures are taken.

There are strong expectations that the Budget will provide a strong stimulus for growth by undertaking massive investment in the economic infrastructure. But there are equally strong expectations that the government will increase social infrastructure expenditures to 'eliminate poverty'. In all this, there is virtue in a golden mean.

Dealing with subsidies

The bulk of subsidies are wrongly targeted but it would be prudent to reduce these subsidies in a phased manner.

The under-recoveries in the petroleum sector in 2013-14 were Rs 46,458 crore for LPG, Rs 62,837 crore for diesel and Rs 30,575 crore for kerosene. While diesel and kerosene had been earlier put on an automat, through monthly increases in prices, this was put in abeyance during the elections; it is imperative that calibrated increases in prices of kerosene and diesel are, once again, put on an automat. In the case of diesel, an increase of Rs 0.50 per litre would reduce the annual subsidy by Rs 5,000 crore. Restoring the earlier automat of monthly price increases would bring the subsidy on diesel well under control.

The rectification programme for LPG has been hanging fire. Petroleum ministry officials have suggested a one-time hike of Rs 250 per cylinder. This will result in a major social agitation by the articulate urban middle class. An alternative would be to raise the LPG price by Rs 50 per cylinder; this would reduce the subsidy by Rs 3,800 crore per annum. It would be best to increase the price of LPG by Rs 50 each quarter. Furthermore, the present subsidised quota of 12 cylinders could be reduced to nine cylinders and later, to six cylinders. Thus, the overall LPG subsidy could be substantially reduced and the subsidy strictly targeted to the BPL group.

The issue price of foodgrain under the Public Distribution System (PDS) needs to be raised in calibrated steps during 2014-15. This is unlikely to cause any social unrest, as the urban population by and large does not access the PDS for food grains as the quality is inedible or the supplies are non-existent in the PDS shops. This is a case of massive leakage of subsidies. More importantly, the government should not hesitate to release foodgrain from the public sector stocks onto the free market. This will no doubt be resisted by the grain-surplus states. Here again, the strategy should be to keep up steady sales from the public sector stocks to prevent market prices from rising.

Direct taxes

Government officials periodically bring up the bogey of imposing a punitive tax on withdrawals by savers from long-term savings schemes, such as provident funds and pension funds (including the National Pension Scheme). This lacks appreciation of the problems of senior citizens.

On completing their working lives, retirees need to undertake bulk withdrawals from the corpus of their savings to meet necessities, like housing, especially on relocating their residence. The threat is that these withdrawals will face punitive taxes.

Yet another aberration is the insensate measure of a couple of years ago of withdrawing the enhanced threshold for income tax in the case of women below 60 years of age. Working women do incur additional costs for looking after their families.

Minister of State for Finance Nirmala Sitharaman, needs to sensitise the ministry of finance officials that the withdrawal of this concession was a retrograde measure. Hence, the erstwhile concession for women below 60 years of age should be restored in the Regular Budget for 2014-15.

There are inordinate delays in income tax refunds. It could be mandated that 12 months after a return is filed, if the Income Tax department is unable to dispute the refund claim, the refund should be automatically credited to the taxpayer's bank account without any further scrutiny, at least for refund claims up to Rs one lakh.

Interest rates on savings

The Indian polity has a preference for low interest rates. If savings are to increase to foster investments, it is preferable to offer higher nominal rates of interest on savings instruments rather than low interest rates with large fiscal concessions.

Concluding plea to the finance minister

While powerful lobbies would effectively articulate their needs, the plea of the common person would be that inflation not be inflicted upon them and they be spared electric shocks of punitive measures which are portrayed as rectification of historical distortions.

Please Note: This article was first published in The Freepress Journal on June 30, 2013. Syndicated.

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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