A populist budget is not a bad thing

There are two people whom I hope Finance Minister P Chidambaram pays heed to when he presents his budget on February 29th. The first Railway Minister Lalu Prasad Yadav, the second P Chidambaram, the author and columnist.
Lalu has cut passenger fares. That should please the UPA, the alliance that is at power in the center, and their voters. But the cut is no give away. Lalu has been cutting rates over the past few budgets, you can call it populist but the cuts don’t put any serious strain on the finances of the railways. That’s a position endorsed by my friend and CNBC TV18’s Economic Policy Editor, Vivian Fernandes.
And P C the author and columnist: Well he exhorts us from bookshop displays across the country that Good Economics Works for Everyone. Bad Economics, I may add, Works for No One. Not even for a Party that faces over a dozen elections in the next 15 months, about 10 states go to the polls before the BIG one. Just look at what Jaswant Singh “gave away” as finance minister just a month before the NDA was voted out in May 2004.

Am I asking P C not to present an “election” budget? Of course not. In fact I would be disappointed in him as a politician if his last full budget before the next elections did not make a political statement. All I am asking is that he leaves the fisc in the health that it is in today or at least don't bleed it too much. Don’t give away with the abandon of a man who knows that the ills of his actions will only visit future finance ministers and governments. Remember that as healthy as the tax collections have been over the last four years India’s fiscal deficit at 6.8% of GDP remains amongst the highest in the world.

Now that number is in itself not such a worrying thing as India also remains one of the fastest growing economies in the world, and while it may not touch last years 9.6% it is still expected to move ahead at a rollicking 8.7%. This, now brings me to what I would like to see him do in this budget, concentrate on growth.

In previous budgets growth was almost taken for granted, the focus was on inflation control. There was nothing wrong with that, after all India was riding the tail wind of a Global boom that pretty much took care of growth. On the other hand high oil prices could have pushed inflation higher than desirable.

But this year things are different. There is the weakness in the global economy, and even if it does not translate into a global recession, the Indian economy will no longer have the benefit of booming global trade. Further there are signs that the five-year old surge in India’s industrial growth may have peaked as long ago as in the last quarter of last year. I would argue then that it is time to cosset the “animal spirit” of industry that drives investment growth.

What can the Chidambaram do to help? . Cutting rates is the most obvious thing. Two rates, interest and tax. The first is not his to do and God knows he has given the RBI enough signals, I just hope he continues doing this doggedly.

Tax rates then. The good thing about an election year is that some tax rates will come down. Actually even if it were not election year, P C is committed to bringing down excise and custom rates. He could also bring down personal income tax rates. All of this will put more money in the pockets of Indian consumers and that is always a good thing. On the Corporate tax side the surcharge on corporate taxes could go but he may find it difficult to get cut in Corporate tax rates past the Left.

But you know something, while Corporate India would welcome a cut in these rates and would be happy to see some of the more “irritating” taxes go they would this time happily settle for anything he does to make it easier to do business in India.

They would like for instance tax compliance costs to come down drastically. Gaurav Taneja, the head of consulting and audit firms Ernst and Young Tax practise, in a discussion on CNBC VT18 pointed out that the compliance cost for a company that a turnover of Rs 10 crore and for that with a turnover of Rs 10,000 crore is about the same. The most recent bugbear here is the Fringe Benefit Tax. In it’s present form it not just pushes up compliance costs but by taxing genuine business expenditure it harks back to the days of disallowance of business expenditure.

Corporate India would also like to see him do something about tax litigation. At last estimate Rs 120 Thousand crore was caught in litigation. This is money that has been paid as taxes, accounted for in the government’s books as receipts but is being disputed by those who have paid the taxes. The Finance minister says corporates are being too litigious. But Dinesh Kannabar, the head of tax practise at audit and consulting firm Price Waterhouse Coopers says the government is the biggest litigant. He argues that it is Tax officers who had lost their cases when it went before the Commissioner of Appeals who have brought up the majority of the 1.5 million cases pending at the Income Tax Appellate tribunal.

The way forward here. Some radical steps. First, fall into the global practise of not allowing a taxman who has lost an appeal heard by his own superior, a commissioner of appeals in this case, to go before the I T Appellate Tribunal. Second; allow a wider scale of advance tax rulings. This means that even before a transaction is carried out the tax department should advise the concerned persons what the tax liability would be. If the tax paid is agreed upon there would be far fewer cases going to court!.

The other thing that needs to be done to keep growth on course is Infrastructure. Current government estimates are that India needs $ 490 billion over the next five years. Equity can only bring in some of this so steps are needed to deepen the debt markets. In addition the extension of exemptions for Power Projects that run out in 2010 and maybe priority sector status for power. More money for rural infrasructure and urban transport would also be welcome. And lets not forget the softer side of infrastructure, a trained, educated work force. Lets hope we see more money spent on education and policy to encourage private sector participation here.

Finally Agriculture. Growth is as much about investment as it is about demand. Tax cuts, employment guarantee programmes all of them certainly help put money into the pockets of rural India. But nothing can do it better than increasing agricultural growth. The 11th plan document hints at the need for another Green Revolution, the programme that in the 60s and the 70s took Indian farm yields to higher trajectory, it would be interesting to see what he does here.

So yes there will be the flavour of elections in this budget. But if Chidambaram were to stick by the Britannica Concise Encyclopedia definition of Populism as a “Political program or movement that champions the common person” and remembers that nothing can Champion the Aam Admi better than Growth, it won’t be a bad thing. Good Economics Works For Everybody.
Source : moneycontrol.com