Budget 2013 should trim expenditure

January 30, 2013

(Any opinions expressed here are those of the author, and not necessarily of Reuters)

Finance Minister P. Chidambaram is only too aware of the damage done by the last budget and has to an extent repaired it to unleash investment. The next budget should confirm his commitment to growth.

The budget is an important tool which, if used properly, can fuel the economy. September onwards, the government has announced measures to turn the economy around and the next budget can be designed to give the big push that is needed.

Surely, there are limitations. GDP growth is down to 5.3 percent and of industry, even lower. This will slow down the generation of tax revenues. To keep the fiscal deficit within 4.8 percent of GDP, as promised by the finance minister, will need a restraint on expenditure.

With fiscal deficit at 4.8 percent, government borrowing cannot be more than 5 trillion rupees, with GDP at current prices at 105 trillion rupees. Any increase in expenditure will have to come from revenue receipts, mainly taxation.

Chidambaram is unlikely to change income tax rates which have stabilized over time. There is surely pressure to tax the very rich following the U.S. initiative. A better option is to mop up revenue by taxing conspicuous consumption. That will not hurt foreign investment. Either way, a substantial increase in revenue cannot be expected.

The other option is to adjust incentives and concessions which bring down the effective rate of taxation. But at this time, when there is a need to rev up investment such a step would be unwise.

It is really indirect taxation that has greater potential, more so the Goods and Services Tax (GST). But looking at differences among the states and the centre and the lengthy procedures that will have to be followed, GST will not be implemented before 2015.

Government revenues have been increasing at 12.4 percent, which can take them to 10 trillion rupees in 2013-14. With government borrowings limited to 5 trillion rupees and loan recoveries at a little more than a trillion rupees, the government can, at best, spend 16 trillion rupees next year. This would be higher than this year’s budgeted expenditure by only 7.2 percent.

Currently, expenditure growth is 14 percent. So the real challenge in the next budget will be to control spending.

Some spending, such as interest payments and defence, which amounts to about a third of total expenditure, cannot be reduced. But there are others, principally subsidies, which can be.  Already, the price of diesel has been increased, railway fares have been raised and a cash transfer scheme introduced. This indicates the government’s determination to take unpleasant but economically necessary decisions to reduce the fiscal imbalance. But these measures do not amount to a solution and further steps will be needed to trim expenditure.

Even though Budget 2013 is likely to be the last before the elections, Chidambaram has assured that it would “not be populist but responsible”. And the emphasis could be on growth to generate jobs and revenues.

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