Broaden tax base, improve quality of public expenditure

Updated: Feb 25 2013, 17:26pm hrs
It may do wonders if the government increases the spend on education and revives investments

I V Subramaniam

A decade or two ago, the budget was an important event for traders or speculators as it allowed them to trade significantly as announcements came in. Fortunes were made or lost, on this day as bets were placed on predicting which companies would do well or which industrial families would do well based on their connections with those in power. Newspapers reports suggested that lobbying, influencing the government or the ministry seeking benefits were common. Competition was killed and competitive wars were fought through budgets. Any increase in indirect taxes had a huge influence on the fortunes of companies, and often it was rumoured that business houses would influence the government to raise indirect taxes for competing products or competitors. Similarly making imports cheaper was a tactic often used to kill competition.

Speculation as to which group or industries would benefit offered huge opportunities for investors to trade in a stock or group of stocks.

In the late 1990s, with the alignment of indirect taxes into a few simple rates as opposed to the myriad different rate slabs we had earlier and reforms to reduce the cascading affect of taxes on raw materials, the chances of speculating have reduced. The budget therefore was an important financial event to look forward to in the past but has become less important in todays environment. However, the budget continues to be important from a nation building point of view.

If discounted cash flows was the method used to value companies, then minor changes made to some taxes may have little impact on the valuation of the company. This budget would be a dream budget, if it just addresses the following:

(i) Increase the spend on education significantly

(ii) Broaden the tax base and improve the quality of the public expenditure- This should help in controlling the fiscal deficit.

While recognising that fiscal deficit needs to be controlled, we cannot wish it away. It may do wonders for the long run if the government revives investments with a cleaner, non-corrupt environment and improves the efficacy of public expenditures and take steps to reduce the incidence of generating black money.

However this being the last budget before the next elections, I do not expect it to be very reform oriented despite the indications given by the FM. On the other hand it will be a good budget, if it controls the urge to increase populist spending and further affect the fiscal deficits.

I do not expect the fiscal deficit to come down significantly and do expect that it may be relatively high given the need to support large sections of the population. I would view the increased spend on National Rural Employment Guarantee Act (NREGA) as a positive sign, although I recognise that its delivery needs to be much more efficient.

I would term the budget as good if it puts in place a reform in agriculture where the farmers benefit from any increase in prices and therefore respond better when prices go up, compared to the present system where the middle man seems to benefit. It will be a big negative if like last year the government makes an attempt to tax with retrospective effect. While a jugglery with the numbers may make the statistics of debt to GDP look attractive or the fiscal deficit look attractive, I hope it is not resorted to, as the market looks at the credibility of the numbers. To conclude, given the political compulsions, I do not expect the budget to be path breaking and will be pleasantly surprised if it turns out to be one.

The author is CEO & CIO Quantum Advisors