Tricky choice for new FM

Tricky choice for new FM

As the countdown begins for the presentation of the Budget 2009-10—the first budget of the newly elected Congress-led UPA government—the Finance Minister Pranab Mukherjee faces the immediate task of reviving the growth momentum of the economy—currently being impacted by the ripple effect of global slowdown.
In the run-up to preparation of the Budget, Mukherjee has already indicated “Reviving the growth momentum of our economy which has been affected by the global financial crisis is the top most priority of the government. The fiscal prudence has to be kept in mind while taking steps for reviving the economy”.  
The basic reason why the Budget should try to revive the growth momentum by creating a cycle of demand in various segments of the economy through necessary fiscal and monetary measures is that a prolonged contraction in demand would be disastrous. It can lead to  a serious problem of job losses, which in turn would ignite social tension.
At the same time, for obvious political reasons, the government is coming under intense pressure to keep up its electoral promises to allocate massive funds for implementing several popular socio-economic welfare measures to push forward the concept of “inclusive growth.” 

Naturally, there is overwhelming expectation that the Budget would focus on programmes targeting rural employment generation, low cost housing for weaker sections of the society, health and primary education that will necessitate massive increase in government expenditure.   Against this backdrop, one thing is crystal clear that the public expenditure both on Plan and Non-Plan heads will substantially go up thus putting pressure on the fiscal front.  But at the same time the new government while focusing on stepping up public spending will face the accompanying challenge of sticking to the course of fiscal consolidation, which calls for minimising the government expenditure.

Living beyond means
The combined fiscal deficit—the net difference between the government’s net income and expenditure—of both Centre and states is apprehended to reach the alarming level of more than 10 per cent of the Gross Domestic Product (GDP) during 2008-09.  Given the growing apprehension of tax revenue growth remaining  subdued for the most part of 2009-10 and most of the other expenditure items like subsidy burden and spending under stimulus packages remaining high, the fiscal deficit will remain high.
Given the political compulsion and extra ordinary situation confronting  the economy in the face of global slowdown, Finance Minister virtually has very little option to curtail public spending. Interestingly the Finance Minister himself has given clear indication that there is no escape from higher government spending in the current fiscal. As he has said “We are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing. This would need to be further continued in the current fiscal 2009-10. However, we are equally committed to the process of fiscal consolidation over a period of say two to three years.”

Difficult options
Against this backdrop let us take a look what could be the broad contour of the forthcoming Budget. Since spurring the growth momentum is the need of the hour, the Finance Minister in the forthcoming Budget is likely to carry forward ongoing stimulus packages, which were unveiled by the government last year as well as early this year to neutralise the ripple effect of global slowdown. 

It is almost certain that Finance Minister would allocate massive funds for ongoing popular socio-economic welfare measures like rural employment guarantee scheme, housing for poor, health, sanitation, drinking water supply and primary education.   
Infrastructure will remain on high priority and is likely to see substantial increase in allocations. Higher allocation to Infrastructure will ensure fewer bottlenecks when economy starts recovering from slowdown. As part of strategy to revive the growth momentum of the economy the forthcoming Budget 2009-10 is likely to unveil a comprehensive package comprising tax benefits to promote investment in wide range of infrastructure sector. Some of the fiscal measures being considered by the Finance Minister to provide tax benefits on investment made in select infrastructure sectors include introduction of investment allowance and increase in rate of depreciation on plants and machinery.

Demands galore
Experts say in the present context of economic slow down, investment in large infrastructure projects will generate significant employment and demand for basic goods like steel and cement. This in turn would give the necessary stimulus for spurring growth momentum of the economy. As part of strategy to spur growth momentum the Budget is likely to provide a benign fiscal regime for those sectors worst hit by the global recession like auto, housing, textile and export-oriented manufacturing units.

As far as auto sector is concerned the forthcoming Budget for 2009-10 is unlikely to raise Excise duty on wide range of automobile including two wheelers and passenger cars. Whatever duty concessions announced for the auto sector including passenger cars, two wheelers and commercial vehicles by the previous government in the stimulus packages are likely to continue in the current fiscal.

Similarly there is growing expectation that the Budget would unveil series of fiscal measures to provide relief to textile industry as well as wide range of export-oriented manufacturing sectors, which have been severely hit by global slowdown.

While the Commerce Minister Anand Sharma is understood to have impressed upon the Finance Minister to provide fiscal relief to exporters currently hit by global slowdown the Textile Minister Dayanidhi Maran is pressing for sops for textile industry—also severely hit by global recession. Similarly, the insurance industry wants the FDI limit to be raised to 49 per cent from the present 26 per cent.

As far as tax proposals are concerned the Finance Minister, who is facing a daunting task of mobilising resources to fund the growing public expenditure, is unlikely to go for any major changes.

Open mind
Any change in tax rate—be it direct or indirect—will be guided by the rationale of boosting the growth momentum of the economy. The Finance Minister has given ample indications that he would not be obsessed with keeping fiscal deficit low. The need of the hour is to take necessary fiscal and monetary measures to revive the growth momentum of the economy. Therefore, there is growing expectation that most of the tax proposals would be growth-oriented, investor-friendly and sober in nature. 

However a great deal of curiosity has arisen as to what sort of approach the Finance Minister will take especially to taxation proposal in the Central Excise front.
There is overwhelming expectation that the Budget is likely to take a benign approach on the duty structure in Central Excise front in view of pressing need to stimulate cycle of demand to promote growth. But if the Centre is determined to go ahead with the introduction of the proposed Goods and Service Tax (GST) from April One, 2010 as scheduled, the Budget will have to lay the fundamental ground work for the new tax regime. 

In that case the Finance Minister will have to increase Excise duty and Service tax rates in the upcoming Budget to harmonise them with the proposed GTS. GST is supposed to converge almost all indirect taxes at the Centre and states. Broadly, it will replace Excise duty, Service tax at the Central level and VAT at the state level.

The government has cut Excise duty rates by six per cent and Service tax by two percent in three stimulus packages, which tax experts expect to be partially rolled back if the Centre wants to go ahead with the GST. To finally realise the Finance Minister’s compulsions and options we will have to wait till July 6, 2009, the Budget day.

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