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Continuity of fiscal reforms crucial

Feb 25 2013, 15:32 IST
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The 2013-14 Union Budget is expected to provide much-needed impetus to growth by accelerating investment and continuing popular policies while not loosening fiscal discipline. (AP) The 2013-14 Union Budget is expected to provide much-needed impetus to growth by accelerating investment and continuing popular policies while not loosening fiscal discipline. (AP)
SummaryThe 2013-14 Union Budget is expected to provide much-needed impetus to growth by accelerating investment and continuing popular policies while not loosening fiscal discipline.

Budget could be a mix of growth enablers, populism & fiscal discipline

Pratik Pant

The 2013-14 Union Budget is expected to provide much-needed impetus to growth by accelerating investment and continuing popular policies while not loosening fiscal discipline. We expect this budget to introduce a roadmap of further fiscal discipline and to focus on increasing government resources, though not at the risk of hampering a recovery in growth. We expect growth to improve in the second half of the year, which should enable policymakers to introduce a slew of policies designed to appeal to the electorate.

Maintaining the pace of measures announced over the last five months to contain the fiscal deficit, we expect further reductions in unplanned expenditure. The key towards achieving this would be a roadmap for expanding the ambitious programme of direct cash subsidy transfers from currently 10% of districts to 40-50% of districts. This scheme directly credits the bank accounts of verified beneficiaries, with the aim of plugging systemic leakages in social spending schemes, thereby helping reduce the fiscal deficit.

To boost government resources, the finance minister could expand the tax base or raise tax rates. Given the state of the economy, however, raising tax rates is unlikely as it would hamper growth. Expanding the tax net has been under consideration for a while and appears the more likely option. While most hurdles have been overcome to allow implementation of the Goods and Services Tax and direct taxes code, there is unlikely to be enough time to enact these two key tax reforms before the elections. However, the crucial provisions of these reforms could form part of this year’s budget, as could be bringing more products and services within the scope of central excise and service tax.

The budget is also likely to amend the direct taxes code, for example, raising the ceiling of taxable income, taxing the returns from maturing savings schemes, amending inheritance tax and commodities trading tax, and raising the minimum alternate tax rate to 20%.

We expect the rail budget to initiate the process of deregulation of railway passenger and freight tariffs by setting up an independent regulator, which would de-politicise ministry finances and contentious decision-making. Furthermore, removing the monopoly in ownership of railway lines could help attract large investment, as has happened in other transport infrastructure.

The government’s advance GDP estimate suggests that growth has fallen to below 5% in the second half of the

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