By S. Sethuraman
India has entered the new fiscal year, ushering in the 12th five-year plan in the most unpropitious circumstances, with challenges in both domestic and external economy to be overcome before moving on to the primrose path of sustainable growth at a less ambitious eight per cent on average over the medium term.
All factors that have militated against macro-economic stability in 2011-12 and that would continue well into the new fiscal year, are all, we are told, due to factors outside the control of Government, mainly the global uncertainty and monetary tightening. Had we not smoothly weathered the global financial crisis of 2008-09 and gloated over India’s resilience to become a “marvel” for the rest of the world?
On the other hand, have we also not seen for the last three years Government’s unconcern as well as inability to control excessive prices in food articles including rice while holding huge stocks of foodgrains, and blaming food inflation on supply constraints which are left to be taken care of over the medium to long-term? Yes, Government kept a watch on the index movements, like any observer, and to avoid embarrassment, the weekly price index for primary articles has been dispensed with.
How the millions of average consumers in the country are left high and dry must no longer be ignored in formulating economic and social policies, another grey area in our planning and development strategy which is ostensibly for “inclusive growth”. There is a a continual widening of income disparities and rural-urban inequalities while the extent of poverty and deprivation is sought to be played down with dubious statistics. At the same time, the economy may be losing its competitiveness.
If we look at the macro aspects of the Union Budget 2012-13, which is claimed to be growth-oriented, there is nothing much to stimulate domestic investment, which needs a strong revival to lift up the sagging economy. No doubt growth envisaged in the new year is a modest 7.5 per cent, which only reflects the economy’s structural weaknesses and policy inertia.
Nor does the Budget hold attraction for the already disenchanted foreign investors, who have now begun to look cautiously, even suspiciously, at the changes proposed in the Income Tax Act which seek to clarify and provide for retrospective application of tax liability for gains in offshore transactions where the value is derived substantially from “assets located in India”.
This sleight of hand move has evoked concerns among multinationals and even countries like UK, whose Chancellor of the Exchequer Mr George Osborne, visiting New Delhi for bilateral dialogue contended it might damage the overall climate for investment in India. Finance Minister Mr Pranab Mukherjee has tried to allay concerns that Government would reopen past cases (dating back to 1962, as the amendment provides for) and said the purpose in amending the income tax law is not to become vindictive.
The legislative intent was to clarify (in the light of the Supreme Court judgement in the Vodafone case) the scope and applicability of tax on income deemed to accrue or arise from assets located in India. That India is not a tax haven and Government has to protect the exchequer from any revenue loss is a point well taken. Reassuringly the Finance Minister has said that holders of Participatory Notes, through which FIIs invest in Indian markets, would not be liable for being taxed in India.
Foreign investors have, however, signalled their strong concern for predictability in the tax regime. It remains to be seen whether the tax amendments would cause some further slowdown in investment flows – direct, debt or equity. Any such negative trend would impact on the country’s balance of payments, for the first time in two decades.
There is no doubt that, whatever be the final outcome at the end of the year, the Finance Minister has worked to a design, namely, to capture as much revenue as possible for a meaningful start to the second wave of fiscal consolidation which for its durability has also to be juxtaposed with expenditure reform. So there is an in-built three-year programme of expenditure control and monitoring in the Finance Bill. He has also brought into the new FRBM legislation the concept of ‘effective revenue deficit” i.e. revenue deficit less grants provided for creation of capital assets. This is designed to lower the estimates and targets for “effective revenue deficit” and “revenue deficit” to 1.8 and 3.4 per cent respectively in fiscal 2013 and to zero per cent and 2.0 per cent respectively in 2014-15.
The Finance Minister has certainly tried to focus on infrastructure building by bringing more areas eligible for viability gap funding (VGF) and enlarged the scope for external commercial borrowings to include sectors like power, road construction, civil aviation and housing. The intentions to address supply bottlenecks in agriculture, energy (coal, power) and transport sectors must be matched by effective actions as inadequate attention to these sectors so far impeded the growth of the economy.
The budgeted fiscal deficit at 5.1 per cent of GDP in fiscal 2013 is not viewed as a credible proposition as it is based on doubtful assumption of drastic cuts in oil and fertiliser subsidies to below 2 per cent of GDP. Also, headline inflation above 5 to 6 per cent would last well into the fiscal year just begun, retarding growth apart from the uncertainties about monsoon and Government draining 3.7 lakh crore rupees in borrowings in the first half of the year, possibly crowding out private investment.
What is of alarming concern is the ever-rising level of prices in India today as a result of not only the budgetary policies of the Centre but also actions of several state governments whose populism and welfare doles for poor are paid for by the people through higher duties and levies on goods and services, as in Tamil Nadu. The Jayalalithaa Government has successively raised milk prices and bus fares and effected a steep hike in power tariff to mop up at least Rs. 8,000 crores.
The Union Budget indirect levies would raise Rs. 45,000 crores but what is worrisome is the universal application of services tax at 12 per cent with a few left in the so-called negative list. The costs would get added on at various levels before the final burden is borne by the consumer. The economy has already had to absorb the rise in petrol prices, revisions in coal, steel, cement and other product prices with chain reaction to come from the 20 per cent across the board rail freight hike. It now awaits hikes in diesel and other oil product prices. (IPA Service)