• Mihir Rakshit heads the Monetary Research Project at ICRA Ltd. He was formerly Professor at the Indian Statistical Institute, Kolkata
The statements contain the usual quota of the ministry's good intentions. However, there is no move towards or awareness of the need for revamping the current system of grossly distortionary and inequitous system of direct taxes.
In the statements submitted with this year's budget in compliance with the Fiscal Responsibility and Budget Management Act (FRBMA) the ministry of finance delineates the emerging macroeconomic scenario; sets out medium term rolling targets for fiscal indicators; and explains the assumptions and fiscal strategy underlying the targets. The statements contain the usual quota of the ministry's good intentions, e.g., focus on outcome (rather than outlay) of government expenditures; broadening of the tax base; targeting of subsidies; and use of capital expenditure only for purposes of productive investment. However, there is no move towards or awareness of the need for revamping the current system of grossly distortionary and inequitous system of direct taxes characterised by absence of any estate duty or inheritance tax; extremely liberal treatment of capital gains; and exemption of all dividends from personal income tax and of practically all financial assets from wealth tax. More important perhaps is likely to be the inefficiency resulting from adhering to the distinction between Plan and non-Plan expenditure; absence any notion regarding optimal allocation of investible resources between PSEs and the government; and treatment of social sector expenditure as current, without any rolling target for its enhancement as a proportion of government expenditure or GDP (so that such expenditure is not squeezed out by the requirement of zero revenue deficit). The most glaring deficiency of the statements however lies in the absence of a coherent macroeconomic framework — an absence that has prevented the ministry from appreciating the role of government expenditure, its composition and its alternative modes of financing in a demand deficient and supply constrained economy for purposes of promoting growth and budgetary viability. Thus though the ministry recognises the need for boosting demand at the present juncture of the Indian economy, it fails to recognise that existence of output gap and large foreign exchange reserves provides a golden opportunity of a significant step up in infrastructural and social sector investment for closing the gap, crowding in private investment, raising RBI holding of GOI securities at the expense of forex reserves and GOI bonds held by the public, and hence boosting the economy's growth potential and strengthening government finances both in the short and medium run.
