Will Budget 2013-14 bring relief to the masses from the
spiralling inflation? Will it be people-oriented, market-oriented, or
both?
Of late, the Government initiated some reform measures,
perhaps keeping in mind the general elections in 2014. Also, the threat
of possible downgrade by international agencies because of the high
current account deficit (exceeding 4.2 per cent of GDP) and fiscal
deficit (estimated at 5.3 per cent of GDP) caused largely by fuel, food
and fertiliser subsidies must have prompted the Government to act.
Steps such as cap on number of subsidised LPG
cylinders, hike in rail fares and partial deregulation of diesel prices
have already been effected to augment the resources and make the Budget
look impressive when presented on February 28.
However, these are likely to have a cascading effect on
the general price level and are bound to hurt the masses. The timing of
these revisions in the backdrop of continued inflationary pressures has
been debated, but the Government seems to justify the the same on the
grounds of having to set right the fiscal imbalance and find resources
to support economic growth which has been lagging.
The Finance Minister, therefore, has a tough job on
hand formulating this year’s Budget. Being a pre-election year, the
Budget has to necessarily be people-oriented with populist measures
and, at the same time, market-oriented too given the fiscal pressures.
The expectation of another dream Budget by every segment of society
cannot be easily overlooked.
Balancing act
The balancing will not be difficult if the Finance
Minister distinguishes between revenues which are inflationary and
those that are not and, accordingly, initiates measures while
formulating the Budget.
More than 80 per cent of the population are middle
class and below, and this segment gets badly affected when prices rise.
This needs to be factored in while assessing the impact of the tax
measures.
Though direct taxes, particularly income-tax, do not
generally add to inflation, indirect taxes do, by pushing up
production, storage, transportation, distribution and marketing costs
of goods and services.
Service tax is a case in point. No doubt it helps the
Government fetch good revenues, but the uniformity and wide coverage of
this tax need to be looked into to soften the effect on inflation.
While food subsidy for the poor is justifiable, the
continuance of fertiliser and fuel subsidies without any relationship
to the affordability of those who benefit from these is undesirable.
It should be need based and the Government should ensure that these do not add to inflation.
While diesel for transportation of essential goods
needs to be subsidised, for those who use it to run their private,
fuel-guzzling vehicles it should not.
Of a population of around 130 crore, less than four
crore come under the income-tax net or file tax returns. This is not
acceptable as the living conditions of many have improved considerably,
thanks to the economic liberalisation of the early 1990s and the
information technology revolution.
With the construction and auto boom witnessed in the
economy over the last two decades, the self-employed group and the
number of well-to-do people both in villages and urban areas have
increased manifold and many do not seem to be even aware of the
taxation policies of the Government.
Tax the super-rich
The value of land has increased considerably and many
have become super-rich overnight. Whether they come under any tax net
is doubtful.
More indirect taxes such as the Securities Transaction
Tax, and luxury tax on movable and immovable items beyond a cut-off
limit need to be identified and introduced for the rich and super-rich.
Capturing information and tracking transactions are essential to bring
these neo-rich into the tax net.
The Government has to necessarily improve its data
collection mechanism to correctly classify people based on income and
wealth. It should ensure that the whole population is covered by its
policies.
Inflation indexation and the components of inflation
also may have to undergo change in such a way that the pattern of
consumption of the middle class and below is captured; the consumption
pattern of the rich and super-rich need not necessarily figure in
there. Also, the present WPI and CPI parameters need a re-look.
The fiscal and current account deficits must be reduced
by containing the fertiliser and fuel subsidies and improving the
investment and savings climate.
Revisiting the expenditures of the Government and all
institutions both in the public and private sectors would help enhance
efficiency and avoid wastage.
The Budget can and should emerge as an important tool
to bring in efficiency in the areas of administration, production,
distribution and marketing of goods and services through improved
taxation policies, tracking of information, and cross-checking the
same.
The objective should be to improve the standard of
living of all categories of people. For this, the Budget should be more
people-oriented and less market-oriented.
The market sentiments will definitely improve once the
economy is back on the growth path. The economy needs a boost and the
Budget can do the trick.
(The author is a Bangalore-based consultant. Views are personal.)
The cap on number of subsidised LPG cylinders, hike in rail fares and
partial deregulation of diesel prices have a cascading effect on
prices.
(This article was published in the Business Line print edition dated February 11, 2013)
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