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.