• JUNE 27, 2014

Let's get real about this Budget

Given the fiscal deficit, carving out a growth stimulus will not be an easy task Wild and unrealistic expectations have been unleashed that the new finance minister, Arun Jaitley, will be a Mr Fixit who will meet the aspirations of all segments of society without applying the bitter medicine of fiscal rectitude. Some reputed economists and commentators advocate that the Government should give a strong stimulus to growth, even if this means a larger fiscal deficit. Unfortunately, any bonanza to a particular segment has to be borne by the rest of the community.

According to the Interim Budget for 2014-15, the fiscal deficit is estimated at Rs. 5, 28, 631 crore (4.1 per cent of GDP). In other words, 30 per cent of total expenditure would be financed by the fiscal deficit. In 2014-15 there are large throw-forwards of expenditures held back from 2013-14 as also acceleration of receipts due in 2014-15 but booked in 2013-14.

Thus, it would be virtually impossible for the new government to contain the fiscal deficit within 4.1 per cent of GDP in 2014-15 without a massive austerity programme. The choice before the Government is to either belie the strong expectations or let the fiscal deficit rise way beyond the Interim Budget figure. The Government would be well advised to follow a cautious fiscal policy which would mean that only a part of the expectations would be fulfilled. Resorting to harsh measures would result in mass discontent which could require a roll-back. Hence, great finesse is required in devising suitable measures.

Tackling Inflation

Since food accounts for a weight of 50 per cent in the Consumer Price Index (CPI), strategies would be required to tackle food inflation. Stepping up releases of foodgrains from the public sector stocks would be a salutary measure but the Government would have to deal with the powerful lobby in the grain-surplus states. Release of public foodgrains stocks would save on the subsidy by way of lower interest and storage costs and also reduce wastage.

Controlling food inflation in non-foodgrain items would be more difficult. Measures such as reduced import duties on select items of mass consumption, improved transport and storage facilities and preventing hoarding would be required.

Reducing Subsidies

Subsidies, which amounted to Rs. 71,000 crore in 2007-08, rose to Rs. 2,56,000 crore in 2013-14. It is imperative that the Government bites the bullet and takes significant and enduring steps to bring down subsidies.

Some efforts have been made to reduce diesel and kerosene subsidies in small, calibrated, monthly phases. Raising the price of diesel by Rs. 0.50 per litre would reduce the diesel subsidy by Rs. 5,000 crore per annum.

The LPG subsidy has become a complicated affair. The number of subsidised cylinders has been raised from six per annum to 12 per annum. Petroleum ministry officials have talked about a one-time increase of Rs. 250 per cylinder. LPG users are the vocal urban middle-class and a sudden large increase in price would cause unmanageable pressures which would force a roll-back. As such, it would be best to increase the price by Rs. 50 per cylinder each quarter. This would reduce the subsidy by Rs. 3,800 crore per annum.

For foodgrains, PDS prices should be raised and subsidies by way of direct cash transfers should be strictly limited to those below the poverty line. In any case the bulk of the urban population does not use the PDS channel and much of the subsidy is lost in leakages.

The objective should be to reduce the total subsidy bill for foodgrains, fertilisers and petroleum by, say, Rs. 50,000 crore per annum over the next three years.

Direct taxes

Some overenthusiastic commentators have called for an immediate move to implement the Direct Taxes Code. The Parliamentary Committee on Finance had made pertinent recommendations, but if implemented these would result in a major dent in government finances.

It would be best to gradually raise the threshold for income tax each year to compensate for inflation. The senior citizen's threshold needs to be raised for those above 70 years of age. Furthermore, abolition of a higher threshold for women below 60 years of age was unconscionable and should be restored. Surely, the articulate Minister of State for Finance Nirmala Sitharaman should see merit in restoring this concession as women in the workforce incur additional expenditure looking after their families.

Care should be taken before implementing any sharp increase in the 80C deduction from income for select savings instruments. An increase of Rs. 1 lakh results in a revenue loss of Rs. 31,000 crore per annum. There are suggestions that on savings instruments the present system of exempt (saving), exempt (income) and exempt (withdrawal), i.e. the EEE system, should be replaced by the EET (tax on withdrawal) system. The EET system is unsuited to a country where there is virtually no social security.

A total exemption of dividend income from income tax is not reflective of distributive justice. Dividends above a specified threshold, say Rs. 5 lakh, should be added to income. If this is not possible because of the powerful corporate lobby, the dividend distribution tax should be raised. If dividends are to be totally free from income tax, interest income from fixed deposits in banks should also be exempt from income tax, at least up to Rs. 1 lakh per annum.


Economists should take heed that today the Planning Commission is empty, the Prime Minister's Economic Advisory Council has not been reconstituted and the ministry of finance does not have a Chief Economic Adviser. Have we economists rendered ourselves redundant?

Please Note: This article was first published in The Hindu Business Line on June 27, 2014.

This column, Maverick View 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 Freepress Journal, is titled Common Voice.


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