Q. Given the current challenges, what, in your opinion, would make for a good budget? What measures or proposals would you like to see?
A. To me, the Union Budget this year should possess multiple agenda. First, on the growth front, it should serve as a trigger to kick-start the investment cycle in the economy . While this has been the government's focus in the last few months as it announced a flurry of economic reforms, the budget allows the government to move a step ahead. It offers an opportunity to the government to signal a stable tax environment especially with respect to foreign investment. This would help alleviate concerns and instill confidence among investors. Additionally, the government needs to send a strong message for facilitation of investment intentions by expressing readiness to implement key pending reforms such as the Land Acquisition Bill and Mines and Minerals Bill. And in the financial sector, the Pension and Insurance bills, among others. It must also allow the newly appointed Cabinet Committee on Investments to take a greater role in expediting pending regulatory clearances.
Second, the pace of domestic savings has shrunk from a high of 36.8 per cent in FY08 to 30.8 per cent in FY12 and it is likely to decline further. This has been led by a decline in savings of the household sector and financial savings, in particular. As such, the budget should aim to incentivise financial savings, by reducing the lock-in period of bank deposits eligible for a tax rebate (from five to three years), increasing the threshold of mandatory TDS (tax deducted at source) on interest income, and broadening the Rajiv Gandhi Equity Saving Scheme, among other measures. In addition, the budget can also look at steps to dissuade physical savings, especially in gold, and thereby lower the pressure on the unsustainable current account deficit. The deficit was at 4.7 per cent of GDP (Gross Domestic Product) during the April-September 2012 period of FY13.
Last and perhaps most critical, the government needs to reinforce its commitment towards fiscal consolidation by announcing a lower, yet credible, fiscal deficit target for FY14. To be able to prune the fiscal deficit target, the finance minister can either increase revenue or reduce expenditure. While the options to increase revenue remain limited in a slowing economy, the focus will, and should be on expenditure management. Pruning of populist subsidies and reorientation of spending towards productive capital spending will provide a much-needed fillip to private investments. The budget should make some big-ticket announcements such as outlining the framework for the GST (Goods and Services Tax) and DTC (Direct Taxes Code), and their time-bound implementation.
Q. Given the constraints the government faces in raising revenue, do you see a case to increase income tax rates on the rich?
A. I don't think that the finance minister will increase income tax on the rich or super-rich. The main agenda for this budget is to ensure continuity and acceleration of the investment cycle. Increasing tax on the rich will reduce enterprise and entrepreneurship. In my opinion, he will aim to increase the tax net while avoiding tax leakages.
Q. If the budget does not meet expectations, do you fear that business sentiment would once again dip?
A. While it is possible, it is extremely unlikely in my opinion. Over the last five months, the government has displayed strong resolve in reviving sentiment through tough and prudent economic measures such as:
- Reducing fuel subsidies
- Kick-starting investments through the CCI (Cabinet Committee on Investments)
- Relaxing capital account rules through the FDI (Foreign Direct Investment) and FII (Foreign Institutional Investor) debt route
- Removing ambiguity on taxation by deferring GAAR (General Anti-Avoidance Rules)
Q. Specific to your sector, what could the current budget do to improve conditions?
A. With respect to the banking sector, as mentioned above, the budget should aim to induce financial savings by reducing the lock-in period on bank deposits eligible for a tax rebate and increasing the threshold of mandatory TDS on interest income. This will not only help reduce the savings investment gap, but also enable the banking sector to generate more medium-term deposits and reduce asset-liability mismatches.
Q. Which budget, in the recent past, do you remember as having been a good one?
A. In the recent past, the FY07 and FY08 budgets stand out as they achieved fiscal consolidation to the extent of 1.5 per cent of GDP over a span of two years. It is noteworthy that the fiscal deficit touched a 34-year low of 2.5 per cent of GDP in FY08.
Importantly, the fiscal compression was not only quantitative but also qualitative. While revenue expenditure was lowered to 11.9 per cent of GDP in FY08 from 12 per cent in FY07, capital expenditure saw an increase to 2.4 per cent of GDP from 1.6 per cent in FY07. The emphasis on capital spending by the government promoted 'crowding in' of investments. The investment ratio jumped to 38 per cent of GDP in FY08 from 35.9 per cent in FY07, primarily on the back of an increase in corporate investment from 14.5 per cent of GDP in FY07 to 17.3 per cent of GDP in FY08.
Prudent fiscal consolidation over FY07 and FY08 led to an improvement in the growth-inflation mix for the economy. While GDP growth averaged 9.4 per cent during the two years, average WPI (Wholesale Price Index) inflation remained benign at 5.6 per cent over the same period.