Modi-led government’s guiding dictum ‘Maximum Governance, Minimum Government’ is a move towards the free functioning of market structure, which economic theory states as the most efficient outcome. Amid this backdrop, the forthcoming budget stands to address bureaucratic inefficiencies and supply side bottlenecks for competitive demand and supply. The government should focus on the following key areas:
FISCAL CONSOLIDATIONS
Rationalise Subsidy Burden
The total subsidy bill must be capped to a non-negotiable 1.8 per cent of GDP. A focussed approach by targeting cash-based transfers, phased deregulation of all petroleum-based products, and greater flexibility to states for implementation of Centrally Sponsored Schemes will act as key enablers.
Create Plan
Expenditure Synergies
In order to rationalise plan expenditure, it is critical to assimilate similar programs under a common head. For instance, The National Food Security Act guarantees entitlement of nutritious food to pregnant and lactating women and children. A similar provision also exists under the ‘Wheat-based nutrition program’ (WBNP) administered by Ministry of Women & Child Development. Likewise, food security programs are offered by different ministries, when encompassed under the PDS, they offer significant scope for merger.
Augment Tax Buoyancy
Last two fiscal years saw plan expenditure bearing the burden of fiscal consolation. To renew growth, expenditure restraint needs to be accompanied by augmentation of tax buoyancy with the aim to increase Tax/GDP ratio to 12 per cent by FY17 from the current 10 per cent via expansion of tax base, immediate implementation of DTC, and GST rollout.
Disinvestment of PSUs
A structure including a timeline as well as alternative investment routes, must be formulated for PSU disinvestments. With sentiment in the equity market remaining conducive, I hope the target for disinvestment is scaled up to `50,000 cr vis-a-vis `21,992 cr in 2013-14.
GROWTH & INFLATION
Boost Capital Expenditure
It is critical to raise capital expenditure to 2.2 per cent of GDP (from 1.7 per cent in FY14) in order to draw in private investments. The budget should focus on providing tax incentives for infrastructure development and investment in Power and Housing sectors.
Generate Jobs
The budget must focus on encouraging labour-intensive sunrise sectors like tourism and healthcare. In addition, emphasis should be laid upon promotion of skill development in conjunction with the reforming of labour laws. These would in turn create enabling conditions for labour engaged in the informal sector.
Incentivise Financial Savings
Appropriate measures to promote retail investors, in equity and debt markets, by way of reducing securities transaction tax (STT) or by increasing the 80C deductions limits (under the Income Tax Act) should be rolled out. Further targeting inflation is imperative since real interests are in the negative zone, discouraging savings in the form of
bank deposits.
Create Opportunities for Foreign Investment
The budget must allow higher foreign investment in Railways along with increasing threshold in insurance and pension sectors up to 49 per cent and defence from the current 26 per cent cap. Further, focus must be on liberalisation of tax guidelines and financial sector reforms to make it conducive for foreign financial companies to operate in India.
STRUCTURAL & INSTITUTIONAL MEASURES
Strengthen Tax
Administration
Forward-looking changes in tax policy should be communicated to all stakeholders, and actualised gradually. An efficient tax dispute settlement mechanism that balances the need to maximise tax revenue and deter non-compliance could be a vital step forward to addressing the inefficiencies involved in litigation on tax disputes.
Recapitalise Public
Sector Banks
In order to divert fiscal pressure, the Government must stick to the FY15 Interim Budget target of `11,200 cr for recapitalisation of PSU Banks. Demand for additional recapitalisation should be met through offloading of equity, hiving off non-core business, issuing bonds, so as to facilitate credit off take to productive sectors.