Budget 2012: Measures Pranab Mukherjee should take to increase revenue and cut spending

The logic of the electoral cycle points unambiguously to a tough budget with stiff taxes, curbs on populist spending, and an emphasis on controlling a runaway fiscal deficit.

The next general election is due in May 2014. Hence there will be no full budget in February 2014, just a vote on account. So, the last budget in which to announce election goodies and giveaways will be in 2013. This in turn means that budget 2012 is the Finance Mister\’s last chance to set his financial house in order before the next election. That should concentrate his mind wonderfully.

The fiscal deficit has spiralled completely out of control this year. In April-December, it reached 92% of the budgeted sum, against just 64% at the same stage last year. Receipts of corporate tax and excise duty have grown by only 6% and 8% respectively against the budgeted 21.5% and 19.2% respectively. Disinvestment has been hobbled by a weak market and political paralysis. Explicit subsidies should be Rs 100,000 crore above budget, mainly because of fertiliser and petroleum under-recoveries. So, the fiscal deficit may be close to 6% of GDP, against the proposed 4.6% this year and 4.1% next year.

What are the key measures Pranab Mukherjee should take to increase revenue and cut spending? Here is a wish list.

  • Increase excise duty and service tax from 10% to 12%, laying the ground for a GST at 12% next year. Expand the service tax net by announcing just a short negative list of items free from service tax. Increase the tax on beedis to at least half the rate on cigarettes. This will be improve both human heath and fiscal health. Increase the import duty on crude oil from zero to 5%.
  • Decontrol diesel oil prices. If this is politically impossible, levy a tax of Rs one lakh on every diesel car. Abolish the kerosene subsidy and instead offer free solar lanterns to all folk currently using kerosene lamps. This will not only reduce government spending but also end adulteration of diesel with kerosene, which is highly polluting and ruins diesel engines. Increase the import duty on gold and silver modestly. This will not only fetch revenue but check the runaway growth in imports of bullion, which have become the third largest import item. Do not increase the duty so much that smuggling of bullion becomes remunerative.
  • Make policy announcements that will enthuse investors. For instance, announce a new scheme for expanding private bank licences, and perhaps foreign bank licences too. Second, announce acceptance of Ajit Singh\’s proposal to allow 49% foreign equity in civil aviation by foreign airlines. Third, announce a shale gas policy that will facilitate a new round of bidding for shale gas deposits. Extend the nutrient-based subsidy for fertilisers to urea-currently this applies only to phosphatic and potassic fertilisers. This will not only check the rising fertiliser subsidy but kickstart fresh investment in urea production-a reported Rs 30,000 crore is waiting to be invested as soon as this reform is announced.
  • For the Food Security Act, index the proposed sale price to inflation. Announce pilot projects to test the Act and eliminate glitches that appear in implementation. Delay full implementation till 2013 to conserve funds and add punch to what will be an election budget. Declare that all these measures will bring the fiscal deficit back to the old target of 4.1%, more than meeting the RBI\’s demand for fiscal consolidation before cutting interest rates. Then sit back and bask in massive cheers for a superb budget.

5 thoughts on “Budget 2012: Measures Pranab Mukherjee should take to increase revenue and cut spending”

  1. You’ve mentioned decontrolling diesel prices. Why not decontrol petrol as well? The social welfare concerns of decontrolling petrol prices cannot be greater than those of decontrolling diesel.

  2. Generous & populist ways of giving subsidies (whether in Food security or fertilizer etc) should be in form of direct cash subsidy only, & that to properly monitored by Aadhaar UIDAI. That will surely help in blocking the loopholes in subsidy schemes, needy population will get the benefits & Govt. can save some monies.
    In order to fire the growth engine of Indian Power sector Govt. should instruct the state Govts. to reduce the subsidies on electricity, this way state electricity companies can come in good financial shape, & can invest more on adding the generating capacities, to fuel the growth of our beloved nation.

  3. I would also suggest to cut out expenditure (or at-least keep the allocated amount unchanged) on un-productive schemes like NREGA. Further instead of using up funds govt. is going to get from sale of equity from PSU like ONGC etc, for fiscal consolidation, it should be used up for investing into new opportunities. They are bleeding out PSU like ONGC. Finally the tax on un-healthy products like cigrettes, beedies, gutkas, alcohol, fast-food outlets etc should be taxed atleast 50% more from current levels

  4. Ramchandran.M.I.

    The wish list of Swaminathan S. Anklesaria Aiyar makes great reading even for Economical illiterates. I hope pranabda will read it and act on it.
    Gold and silver have been subjected to specific rate of duty for quite some time now, The mateoric rise of bullion has, therefore, been not translated into revenue to the Govt as duty rate is insulated from price rise. The key is not to raise it to a level, as pointed out by Swaminathan S. Anklesaria Aiyar, encouaraging smuggling. Further, why not announce another amnesty sheme for black money horders. Let us say by paying 50% of the hitherto undisclosed black money one can buy immunity from prosecution and other legal hassles. With High Courts and Supreme courts taking grim view on such illgotten non taxed black money( remember Kripa Shankar Singh case) politician will be happy to buy peace by peace. Swiss bank account holders also will find a legitimate way to bring back their illgotten money back to India. Another simple steps which will go a longway in curbing black money is to make it compulsory to furnish PAN with every real estate transaction any where in Icountry. Along with PAN a small declaration giving details such as other land holdings by self and family members, should be made compulsary and furnishing deliberate wrong information should attract heavy penalty including forfeture of the property. A copy of the said declaration should be forwarded by the registration authorities to respective Income Tax offices. Problems with state Governments, in implementing the same, can be sorted out if one has the political will to do it. Sounds draconian? I think it is quite reasonable in a country where even Income Tax Commissioners pay black portion when buying houses and somany people engage in benami transactions. If it cannot be implemented through out the country in one stroke , it should be made applicable to all urban and semi-urban centres where such transactions are maximum. provisions should be made in I.T.Act to confiscate such properties , if it is proved beyond doubt that they are so. If any citizen provide legally tenable proof of banami real astate transactions or blackmoney accounts, he/she should be given 20% of the value of the property ultimately confiscated by Govt.

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