Expert Zone

Straight from the Specialists

Pressures on the 2011 Budget

February 14, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Finance Minister Pranab Mukherjee in New Delhi January 19, 2011. REUTERS/B Mathur/FilesThe economy is under some stress. Inflation has relapsed and interest rates have jumped. Industrial growth has plunged but exports have been performing well. Parliament is paralysed. That puts the 2011 budget under pressure.

Budget expenditures will increase but revenues will not be buoyant and the fiscal deficit may not drop any further unless the Finance Minister initiates steps to put some pep into the economy with reforms.

The additional expenditures can be quite substantial. The Railways have demanded doubling budgetary support to 360 billion rupees. With West Bengal going to the polls in May, this demand will have to be at least partly accepted. The National Advisory Council headed by Sonia Gandhi has pitched its demand for widening of the PDS which will involve not only larger subsidies but also shortfall in market supply which will kick up food grain prices.

Further, the food inflation has necessitated larger investment in agriculture and irrigation. On top of that, an investment of 50 trillion rupees has to be made in infrastructure in the next five years starting with the next budget.

But the revenue budget may not be rosy. With industrial growth down to 1.6 percent, the buoyancy in tax revenues seen in 2010-11 will not be maintained next year since the bulk of the revenues from corporation tax, customs and excise come from industry. Besides, any new non-tax revenues are not in sight except possibly some penal realisations from 2G spectrum allottees.

The government has appointed a committee to suggest a formula for efficient and transparent distribution of scarce resources like telecom spectrum, coal mines, etc. which may reduce corruption and bring in some small revenue. Disinvestment is another resource but is subject to political limitations.

The Finance Minister will therefore have to look at other means to fund expenditure. He had indicated in the 2010 budget that he would roll out GST (goods and services tax) and DTC (direct tax code) effective April 2011. In spite of last-ditch efforts to make the state governments agree to GST, there appear to be differences which are yet to be reconciled.

Not many changes in direct taxes can be expected. Possibly, the exemption limit for personal income tax may be raised to give some relief from inflation to the ‘aam aadmi’. It is also likely that fiscal incentives which were given earlier to boost the economy during world recession may be completely withdrawn. That means a 2 percent increase in excise duties. No wonder car sales in January were a new record, perhaps in anticipation.

Reforms, however, can go a long way to push growth and reduce fiscal deficit. Two are critical. Government has already deregulated petrol, it can now deregulate diesel. Second, the huge investment to be made in infrastructure can be promoted in partnership with private sector particularly with foreign companies. This will call for comprehensive reform of foreign investment regulations.

Inflation is not a really a budgetary issue but growth is. For that, fiscal deficit has to be brought down and reforms resumed. Neither is easy.

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