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Budget Columns Details

Avoid big-ticket welfare schemes: Naresh Takkar

Naresh Takkar / Mumbai 22 Feb 13 | 04:17 PM
58 Replies

Concerns related to the health of the Indian economy have eased somewhat in recent weeks following a moderation of core inflation, revision of diesel pricing and resumption of monetary easing amidst signs of a bottoming out of non-agricultural growth. The Union Budget is keenly awaited as its tone would influence the timing of policy rate cuts with comments made recently by the Finance Minister raising expectations of a responsible Budget.

With GDP growth expected to display a modest improvement in 2013-14, peak indirect tax rates should be maintained at current levels in our view. However, exemptions should be pruned and rates should be rationalised especially in cases where duty structures are inverted, in order to boost revenue collections.

The design of the Goods and Services Tax (GST) and the timeline for implementation being considered should be included in the Budget. A higher exemption limit for personal income tax may be considered to boost consumption sentiments. Overall, direct and indirect tax collections are likely to display a moderate expansion in the coming fiscal.

Expenditure-side factors would crucially determine the extent of fiscal consolidation that GoI is able to achieve in 2013-14. With inflexible expenses like interest payments and pensions accounting for nearly one-third of revenue expenditures, the scope to restrain spending growth appears limited.

The Budget for 2012-13 had set a target to reduce subsidy expenditure to 1.75% of GDP over a three-year period by curtailing subsidies other than those related to food. Food subsidies are likely to rise in 2013-14 reflecting higher minimum support prices and the expanding entitlements proposed under the National Food Security Act. A likely decline in subsidy on non-urea products may help curtail fertiliser subsidies in 2013-14. Nevertheless, it is crucial that diesel prices are revised regularly to minimise under-recoveries and fuel subsidies. 

The introduction of big-ticket welfare schemes are best avoided at this stage, despite Parliamentary and several Legislative elections scheduled to take place over the next 15 months. Instead, the focus should be on increasing the magnitude and pace of capital expenditure by the Government and various PSUs to reduce the infrastructure bottlenecks, boost growth and create jobs.

Additionally, adequate recapitalization of Public Sector Banks is required. Beyond the presentation of the Union Budget, the extent to which progress is made on several crucial pieces of Legislation in the Budget Session is important. Revival of private sector investment activity critically depends on policy measures to ensure ease of land acquisition, availability of reasonably-priced power for industrial use and removal of infrastructure bottlenecks, which would help growth revert to the trend of 8-9% seen in previous years. A continued momentum of reform announcements is essential to ensure sentiments of global investors regarding India remain positive, in order to avoid costly and destabilising capital outflows.


The author is MD and CEO, ICRA Ltd

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