Hats off to the economic survey

surveyIt is good hear the hopeful news from the economic survey for the year 2009-10. It promises the good health of the Indian economy despite the global shockwaves. If this is going to be realised then we must salute the country’s ruling representatives.

The Economic Survey 2008-09 says India’s economy is in revival mode. But we’re asked to junk complacency. Fiscal measures taken so far to beat the
slowdown could trigger high inflation down the line. That’s why the survey makes a welcome pitch for big-ticket reforms to improve the investment climate. Will the finance minister act? What’s for sure is that, come budget day, he must prove a consummate juggler. He must target growth despite weak private demand. But he must weigh fiscal stimuli against their potential inflationary effects. He will want to boost social spending. But that mandates fund-raising. He may provide tax sops. Yet he must tackle thinning tax collections. And there’s the fiscal deficit. Ergo, populism will pinch.

On taxes, broad-based reform means pushing the goods and services tax (GST). Boosting compliance, GST will fatten public coffers in a way high taxes, leading to tax avoidance, can’t. Aam aadmi and industry expect the FM to read their lips about no new taxes. People face high food prices and, now, more expensive fuel. Businesses face feeble domestic and global demand. Some comfort is expected on personal income tax, whether lower rates, higher exemptions or restored standard deduction. India Inc wants surcharge on corporate tax removed and the tax rate brought in line with global averages. Plus there’s a case for dumping the fringe benefit tax, which penalises employers for incentivising staff or burdens employees when perks morph into taxable pay. Equally, it’s sensible to continue with stimuli like reduced service tax and CENVAT. Finally, the New Pension Scheme should make withdrawal tax-exempt if it is to find takers.

Greater budgetary support is anticipated for social programmes. However, the problems of unmet targets, unutilised funds and leakages must be addressed. Infrastructure needs a big push, with penalties against time and cost overruns. Whether mammoth projects involve food security or housing for urban poor, workability issues are paramount such as identifying the beneficiaries of subsidies and ensuring Centre-state coordination. Alternative mechanisms to PDS ^ direct cash transfers, food coupons ^ can be experimented with. Increased social sector allocations mandate improved delivery systems and, here, the unique ID scheme will be invaluable.

As for financing social schemes, taxing the rich or public borrowing are bad pills given their side effects. We urgently need the reform route to resource mobilisation: disinvestment, subsidy rationalisation, fuel price deregulation, auctioning of spectrum for 3G. Finally, fiscal responsibility and budget management norms need reviving to promote debt servicing and sustain India’s global credit rating. More so, since India needs FDI in sectors like retail, insurance, education and infrastructure. Foreign investors need convincing about the structural strengths and growth potential of Asia’s third largest economy. Let Budget 2009-10 make a persuasive case.

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