The finance minister being a cautious politician will have a modest programme of disinvestment and none for privatisation.
In two days, Finance Minister Pranab Mukherjee will present the Union budget. He is an unimaginative minister, but politically very astute, and good at keeping everybody on board. Despite unprecedented challenges, no imaginative flourishes can be expected. The fiscal deficit is said to be a record 16 per cent, far worse than in 1991. I expect that Mukherjee will not fudge the figures to hide the reality. His primary challenge is to restore the credibility of our fiscal system by showing a roadmap for bringing the burgeoning deficit under control in a few years. The Budget will present a plan, to avoid down rating and consequent problems with overseas borrowing, higher interest costs, revived inflationary pressures and slackening growth.
Exports of textiles, garments, gems and jewellery, etc, are down by 30 pc or more. So are foreign exchange earnings of the IT industry, tourism, airlines. Layoffs in industry and services have affected urban white collar and some blue collar workers. We can expect introduction of some form of unemployment insurance and benefits, as well as an increase in bank deposit insurance to stimulate lending especially to small industries.
With the forecasted failure of the monsoon, the rural and agricultural sector will experience adversity. The Budget will surely provide for substantial expenditures on rural relief projects and for importing food grains. Overall budget expenditures are already high because of the payouts of the Pay Commission recommendations, ballooning subsidy payments on food and fertilizers, continuing deficits of the public sector-owned oil companies, huge costs of programmes like the National Rural Employment Guarantee Scheme, and other social programmes.
The Budget should introduce measures for improving efficiencies in expenditures, especially on subsidies, NREGS, etc. Improved targeting has never been achieved. A national identity card is an answer but was held up by the bureaucracy. A mission approach to expedite it will bring results in better targeting and reduced expenditures. Procurement operations also are hugely wasteful and supply chain management can cut this waste, saving money and giving the poor a better quality of grains.
Government tax revenues are depressed. Recent corporate revival is not yet strong. The golden geese are disinvestment and spectrum sale. Without the albatross of the Communist support these can raise substantial revenues. The problem is the ideological orientation of many Congressmen and the DMK's venality.
State enterprises
Congressmen regard state enterprises as family silver and not to be sold. Ministers and bureaucrats want control over state enterprises. They want protection to the workers, irrespective of corporate performance. The finance minister, a cautious politician, will have a modest programme of disinvestment and none for privatisation. The DMK minister for telecom will probably be silenced because of pressure of industry for more spectrums. The Budget will garner the large realisations from spectrum sale.
We must expect relaxation of restrictions on foreign investment in insurance, pensions, telecom and retail. Some additional revenues are possible on transactions to buy into local companies.
A source of revenue that the Congress has foregone for years is because of exemption of foreign investments from Mauritius and some other countries from short-term capital gains tax. The consequent ebb and flow of foreign funds has caused great volatility in the stock market and the rupee’s exchange value. Eliminating it altogether or even imposing a nominal 5 pc tax instead of the 10 pc normally applicable, will add to revenues and reduce volatility. However this minister is unlikely to stray off a course long held by the Congress party and the exemptions may continue and also the volatility.
With oil and gas prices on the rise and the commencement of supplies from private leasers, a windfall profits tax on extra profits would be timely and a good source of revenue. But the protective umbrella of the petroleum minister might save the private companies. But prices for the public sector oil companies might be raised, adding to government revenues and reducing subsidy costs.
Fringe benefit tax
Fringe benefits tax will not be abolished, given the grim fiscal situation, perhaps simplified. Income tax slabs may not change, but tax exemptions for small savings invested in infrastructure bonds with a lock in period as with the public provident funds, will almost certainly be introduced, adding to finance for infrastructure projects.
No further excise duty changes than the 6 pc earlier reduction can be expected. Service taxes will remain unchanged, though this non-lawyer finance minister should bring the lawyers into the net. Some special tax concessions on investment in export oriented sectors, as also expansion of the definition of infrastructure for fiscal relief to include cement, steel, hotels and other tourism investments are likely.
We must look for special incentives to the organised sector in labour intensive industries like garments, toys, leather, etc. China dominates labour intensive products in world trade. Our labour laws have made the employing of large numbers in businesses subject to sales volatility and layoffs impossible. Tax concessions to build a fund to enable such layoffs, might be introduced as a substitute for inability to change the labour legislation.
