March 12, 2011
This article was originally published by Sahara TIME.
The budget 2011 is one among a series of budgets in the medium term that seeks to consolidate the Central government’s fiscal deficit and this is in line with what I had expected. Fiscal consolidation is mainly driven by revenue growth and steps in that direction are crucial in order to reconstitute fiscal space.
Fiscal space means the government can launch a well-targeted expansionary expenditure policy so as to boost investments in infrastructure. Massive increases in infrastructure are needed in order to raise India’s potential rates of economic growth in the long run and to achieve better balance in growth rates among India’s states. The Budget seems to recognise the need to boost growth rates in some lagging areas where there is widespread discontent that is driving certain insurgency groups like the Naxalites. Better balance in economic growth will help to achieve national cohesiveness.
The Budget 2011 also signals to the markets that the government is trying to ensure a higher rate of economic growth that is as broad-based among all income groups as possible. Again, I had commented earlier that inclusive and broadbased growth is needed not only to boost India’s potential GDP growth in the long run, but also to stem the generation and transmission of black money which partly stems from a highly skewed distribution of income. The Budget shows increasing social expenditures targeted towards the lower income groups. As I mentioned, all these expenditure policies are possible when there is an effort to create genuine fiscal space. If the budget is already in deficit and the deficits are rising, the government does not have the option of increasing expenditures to help alleviate poverty or to carry out massive infrastructure investments without heavy external borrowing. This far, India has been able to generate impressible growth rates without running up external debt-driven investments. Rather, India has managed to attract non-debt creating capital inflows like portfolio investments and foreign direct investments. The Budget 2011, which lays the foundation for fiscal consolidation in the medium term, can attract more FDI through improvements in infrastructure discussed above.
That said, I do not find a significant move towards tax reform although there is some movement to widen the tax net a bit. I would say that significant tax reform aimed at increasing the direct tax net to bring in additional informal markets within the tax net is a policy step that would be taken in incremental steps. We should not expect things to change overnight in such matters – the technical logistics involved in widening the direct tax base are daunting indeed. However, I am somewhat concerned that the move towards self-assessments in custom duties whereby traders are allowed to assess the applicable duties, may be abused without adequate improvements in oversight and overall public and corporate governance. If corruption is not curtailed in both these sectors, self-assessments may encourage more trade mispricing, not less. It may well be that the government is seeking to improve the flows of goods and services through the country’s borders and studying the selfassessment duty system on a trial basis in that context.
The importance of improvements in overall governance cannot be over-emphasised. The efficiency of government investments means the minimisation of leakages through corruption and graft, the ability of government social programmes to reach the intended target population, all depends upon closing the governance deficits. So, the government’s effort to rein in black money announced by the Finance minister is most welcome. We, at Global Finance Integrity, are eagerly waiting to see positive results from these initiatives and we are ready to collaborate with the concerned government agencies in curtailing the generation, cross-border transmission and absorption of black money.
(The author, formerly a Senior Economist at the International Monetary Fund (IMF), is Lead Economist at Global Financial Integrity (GFI), Washington; the views expressed here are personal)