Column: Budget for bold fiscal consolidation

Jul 07 2014, 21:09 IST
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SummaryThe govt must look at improving the quality of its expenditure and encouraging investment

The strong electoral verdict for the new government has raised expectations that it will deliver on a variety of fronts, including boosting economic growth, infrastructure creation, introducing market reforms, managing inflation and improving fiscal outcomes, among others. The Centre is expected to gradually cull out a definitive medium-term agenda from the vision laid out in the President’s address to Parliament in June 2014. While a lead-time of six weeks is very short, we expect the upcoming revised Budget for FY15 to deliver some policy specifics to ensure that the rejuvenated animal spirits do not wane.

A clear, predictable and stable tax regime is crucial to an environment supportive of investment. At the same time, it is vital to widen India’s tax base, which is significantly smaller than many advanced nations and EMEs of a comparable size. The revised Budget for FY15 is expected to clarify the new government’s vision on tax reforms, including decisions on optimal tax rates, exemptions, surcharges and measures to improve compliance, as well as the way forward for the implementation of the goods and services tax (GST).

It is too early in the term of the new government for it to have devised specific schemes, which we expect would be revealed in the Budget for FY16. But it would be prudent to prioritise amongst various options as large-scale infrastructure projects would compete for scarce financial and other resources, including land. For instance, given limited fiscal space, large scale roll-out of the high-speed bullet trains may be deferred at present.

Trimming unproductive schemes, cutting leakages and paring subsidy expenditure would be crucial to freeing up resources for productive spending. Committing to a cap on subsidies as a percentage of the GDP would help improve the quality of government expenditure and encourage investment-led growth.

Revising administered prices is challenging even at times when inflation is low. However, it is not impossible, as demonstrated by the monthly revisions of diesel prices, which have now been carried out fairly regularly since January 2013. With under-recoveries from LPG retail forming the largest component of fuel subsidies, it may be appropriate to introduce calibrated monthly revisions of R15-20/cylinder in the Budget. This way, the impact on household finances would be small given the vast majority of families are estimated to consume less than one cylinder of LPG per month. A clear policy would help limit the perceived vulnerability of India’s fiscal and current account deficits, as

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