Budget and Governance Deficit

The Budget should aim at capturing all forms of economic activities, particularly under the unorganised sector, and bring them under the information system formally.

March 4, 2012:
The economy has not been doing well for the past couple of years on account of both domestic and external factors. GDP growth has slowed and is expected to be at 7-7.5 per cent as against the required 9 per cent to make it internationally competitive and justify its position as a fast growing economy among the BRIC nations.

The fiscal deficit, current account deficit and inflation continue to remain high and if the GDP growth does not pick up, the situation will be grim and will erase not only the potential to make up for the loss but also to regain the credibility of investors in particular, which is vital to put the economy back on fast track.

The Finance Minister has a key and a challenging role to perform. He has to make Budget 2012-13 a tool to set right the past mistakes and make the economy perform better.

Plugging the loopholes
There is no disputing the strength of the economy and its potential to make a comeback. Perhaps, the Budget can do the trick provided it is drafted to plug the loopholes in governance and enhance investment, production and consumption, with equal attention to augmenting the revenues without any leakage due to corruption, lack of accountability and proper information system.

The approach should be to ensure accountability for the gaps between expectations and achievements. The industrial, agriculture and services sectors contribute to the GDP and there should be separate targets for investment, production and revenue contributions from these sectors.

To have a clear idea as to which sector performs well and which needs special attention, there should be a separate target for indirect taxes from these three sectors.

The indirect taxes in the form of excise and Customs duties where the scope for corruption is reported to be very high needs to be re examined and thoroughly revamped to ensure that there is absolutely no possibility for manipulation and leakage either in the reporting of transactions or in the revenue collection.

The Government expenditure on these three sectors also needs to be closely monitored to fix responsibility for leakage. The monetary and social benefits from Government spending should be assessed at periodical intervals and accountability for any shortfalls in the achievements needs to be fixed.

There should be adequate checks and balances to ensure that there exists a proper relationship between investment, production, exports, imports and revenue collections and there is no undue misrepresentation of facts by any agency involved.

Usage of subsidies is one area requiring close surveillance and for this the Central Government should have special arrangement, even at a cost, to ensure that subsidy has the desired impact. Information technology should be put to optimum use to strengthen the database and initiate follow-up action.

Corporate governance
The institutions involved should practice corporate governance in letter and spirit and this has to be made verifiable by any agency under social audit. Ethics and code of conduct pursued by institutions and various agencies need to be made transparent and their contribution to national wealth needs to be assessed, rated and recognised. The Budget can definitely find some provision towards this end.

The Budget should aim at capturing all forms of economic activities, particularly under the unorganised sector, and bring them under the information system formally. Many States face labour shortage for agricultural activities even as people are employed in metros and urban areas on contract basis or otherwise and, possibly, without being accounted for employment or income. Though this has helped improve the poverty levels, it does not seem to have captured the attention of the authorities. Financial inclusion, particularly banking, with the support of State governments can be an easy solution for many of the labour-related problems both in the rural and urban areas.

Fiscal deficit which continues to rise unabated has to be closely monitored and reviewed along with the monetary policy review. The agricultural sector, which is identified as one of the major factors influencing inflation, has not been performing well despite having enjoyed favourable monsoon and financial support.

The institutions responsible for poor performance of this sector have to be identified and made accountable. Though agriculture is a State subject, the interference of the Central Government is often blamed for the failure of this sector in not contributing to the GDP to the extent required and reducing inflationary pressures.

The Finance Minister can identify the areas and make necessary changes in the Budgetary provisions to ensure that the Central Government is not blamed. Food subsidy and food security can be made the responsibility of the State Governments with appropriate contribution from the Central Government based on some performance criteria.

Direct taxes
The direct taxes need to be completely re-examined, although the Direct Taxes Code will take care of it as and when it is brought into force. The direct tax for corporates and individuals has to undergo drastic changes.

The uniformity pursued currently for all corporates — irrespective of their capital base, business turnover, exports/imports, corporate governance practices, and social responsibility — has to undergo change to improve competition, transparency, accountability and overall performance and contribution to the economy.

The corporates having more of capital contribution from retail investors and having a turnover of some cut-off limit fixed by the Government should attract lower taxes. This will ensure better distribution of wealth and stability to the capital market.

Similarly, companies having good retail distribution of capital and which are regularly distributing dividends and bonus shares need tax incentives from the angle of capital formation.

Companies that contribute to infrastructure development deserve preferential treatment both for capital formation and distribution of wealth. Companies which are monopolies and closely-held need a different tax treatment from tax angle.

The direct tax for individuals which forms only a insignificant portion of overall tax collections and the exemptions allowed therein have to be made simple and attractive for better compliance.

Savings in the form of financial instruments need to be encouraged and those in the form of gold, silver, real estate, and so on, need to be discouraged. The tax incentives now given for acquisition of house need to continue, but it should be restricted to one house for a family.

The current tax return does not reflect the total assets and liabilities of taxpayers. The return should enable one to report all incomes from various sources without any ambiguity. The return should be made obligatory for all taxpayers above a cut-off point of, say, Rs 10 lakh.

The concept of capital gains/losses should be done away with by suitably changing the Securities Transaction Tax or by introducing some form of transaction tax. Tax should be collected as far as possible at source without expecting individuals, particularly senior citizens, to keep track of transactions, compute taxes and file returns.

TDS
Make the institutions responsible to deduct tax at source and make the individuals, particularly those having income less than Rs 10 lakh, free from grappling with tax matters. It is necessary that all transactions above Rs 5,000 are made through banking channels or through plastic cards, which itself will help improve tax compliance.

The Indian economy has all the resources and talent, but what is missing is the commitment and involvement of all the segments to make it really strong, healthy and vibrant.

As Gandhiji put it, “The difference between what we do and what we are capable of doing would suffice to solve most of the world's problems.”

The Finance Minister through his Budget of 2012-13 should aim to bridge this gap and take the economy forward and fulfil the aspirations of the people.

Dr.T.V.Gopalakrishnan.
( This article appeared in Business Line dt5/3/12