JOIN USFM faces Hobson's Choice
As the countdown has began for the presentation of the Budget, the Indian industry, which is just seeing signs of recovery after being battered by the ripple effect of the global slowdown since September, 2008, is expecting industry-friendly action from the FM.
But the pertinent question is: What will the Finance Minister do, or can do, in the given complex macro-economic scenario?
On the one hand, FM faces the daunting task of putting the economy on the path of fiscal consolidation as the fiscal deficit-the net difference between the government’s expenditure and income-has ballooned threatening the overall fiscal equilibrium.
The fact that fiscal deficit, which is expected to reach 6.8 per cent of the Gross Domestic Product (GDP), is galloping because the government has stepped up public expenditure as well as sacrificed huge revenues by doling out tax concessions extended through series of stimulus packages to three key sectors –– trade, industry and export. This was done to bail out the economy caught in the quagmire of global slowdown.
Pulls and pressures
The second piquant situation facing the Finance Minister is that if he does not continue with the ongoing fiscal stimulus he faces the risk of endangering the ongoing growth momentum, which was achieved after putting necessary fiscal incentives in place.
Many economists feel the Finance Minister is coming under increasing pressure to begin fiscal consolidation with the Budget as country’s fiscal deficit has reached unmanageable proportions. Doling out sops through stimulus packages, ever-growing subsidies on various items and rising government expenditure are the culprits.
In fact in run-up to the Budget the Prime Minister’s Economic Advisory Council (PMEAC) has strongly suggested to the government to initiate measures for fiscal correction immediately.
Curbing expenditure
“Government finances have come under a severe strain since 2008-09 and fiscal imbalance in the country is now a matter of concern. Government cannot continue with the kind of large revenue and fiscal deficits recorded in the last two years,” the PMEAC Chairman C Rangarajan has noted in the Council’s review of the economy in 2009-10. As such Finance Minister faces an uphill task to cut down expenditure given the fact he has little scope to cut spending on large number of popular schemes floated by the ruling UPA alliance.
Even on cutting down wasteful expenditure like all sorts of subsidies Mukherjee faces obstacles in view of political sensitivity. The government, however, has made a small beginning last week to lower fertiliser subsidy under a new Nutrient Based Subsidy (NBS) policy. With this the fertiliser subsidy bill, may come down by around Rs 20,000 crore.
But looking at the figure of overall non-plan expenditure of estimated Rs 6,18,834 crore in the current fiscal, drop in fertiliser subsidy will not make a big difference.
Thus many feel that the Budget is unlikely to peg fiscal deficit below the 5.5 per cent-mark –– as was earlier estimated.
Tackling social spending
The government will also find it difficult to lower other expenses as it is very eager to accelerate expenditure in the agriculture and social sectors that include several popular flagship welfare schemes aimed at rural population and weaker section of the society. Thus Mukherjee faces a major challenge when he tries to balance the efforts to curb rising fiscal deficit against the need to finance the country’s social sectors without impeding growth.
The Finance Minister is also caught in a bind over whether the fiscal stimuli provided to the industry to help it tide over the problem of an economic slowdown should be rolled back in a phased manner. If the stimulus measures are withdrawn too quickly, sectors that have just begun to come out of the slowdown might slip back in to a recession, but if the rollback in not done in time, fiscal deficit could rise rapidly constricting the government’s ability to spend more on major sectors.
But even though Mukherjee has held that country cannot sustain high fiscal deficit in the long run, many feel that he might not be able to rollback all the duty sops given to the industry to insulate it from the ill-effects of the global economic crisis.
If these sops are continued during the fiscal year 2010-11 too, it would amount to a loss of around Rs 60,000 crore to the exchequer, but all the apex chambers of trade and industry like Ficci, CII and Assocham in their pre-Budget wish-lists have been vociferously lobbying for the continuance of the stimulus. As the Ficci President Harsh Pati Singhania says Finance Minister should continue with the stimulus measures to sustain the growth impulses in the economy and abrupt withdrawal would derail the growth process and adversely impact the industrial sector.
“We are conscious of the problems of fiscal deficit but we feel that the government can pursue lowering of fiscal deficit after the economy has recovered strongly. A sustainable recovery will itself help to meet FRBM targets,” he suggests.
With most world economies still to come out of the recessionary quagmire they found themselves in during the last year and the domestic demand too not yet robust enough, analysts feel the industry might be justified in pleading for an extension of the ongoing fiscal stimulus packages.
But there is a thought within the Finance Ministry that tax benefits announced in the stimulus package should be partially withdrawn by partially rolling back Excise duty cuts on wide range of consumer and manufacturing goods and restoring Service Tax to the earlier level of 12 per cent.
The industry feels that withdrawing the stimulus could hurt the nation’s growth and the government’s prime aim must be to push forward for 8 per cent-plus growth as it will lead to higher tax collections and add to the revenue kitty. This will also help reduce the fiscal deficit to that extent, they argue.
While the Reserve Bank has been hinting at a tightening of the monetary stimulus, noted economist and PMEAC Chairman C Rangarajan, has suggested that any unwinding of the fiscal stimulus should be gradual so that the step is non-disruptive to the real economy.
But at the same time the PMEAC in its latest update on Review of the Economy in 2009-10 has suggested that in view of proposed introduction of the Goods and Services Tax (GST) the Centre could expand the base of Service Tax by converting the selective taxation of services into a general taxation, unify the threshold and rate structure of Cenvat and Service Tax and peg it between the current and the previous higher level.
Thus, indirectly the council suggests for partial rollback in the duty cuts extended to wide spectrum of goods and services.
But analysts say even if Finance Minister will like not to roll back the ongoing stimulus packages keeping the just revived growth momentum of the economy the very need for initiating the fiscal correction may force him to go for partial roll back of duty cuts in a selective manner if not applying the across the board formulae.
On the whole Mukherjee will face a daunting task on initiating the necessary measures for fiscal correction without hurting the growth momentum, which is still at a nascent stage.