The expectation that the government will revive the reform agenda in the Budget has been belied. This is unfortunate, for the government has a narrow window of about 18 months before the election fewer grips again and lack of clear signalling in the Budget only confirms the reform fatigue. The Budget has reaffirmed the sharp increase in the fiscal deficit over the budgeted numbers, and there is very little of the concrete policy measures or strategies necessary to put the fiscal rail back on track. At the same time, micromanagement of the economy to achieve a variety of goals through tax policy will only add to complexity and open up the floodgates for evasion and avoidance.
It was very well known that there has been a significant slippage in the fiscal deficit targets in 2011-12. What is surprising is that the slippage has been far more than expected. Both revenue deficit and effective revenue deficit as a ratio of GDP have increased by over one percentage point over the Budget estimate. The slippage in fiscal deficit is by 1.3 percentage points, from the budgeted 4.6% to 5.9%. Besides, one is not sure how much of the deficit has been pushed to the next year by not making payments to fertiliser and oil marketing companies. The slippage has reversed the entire adjustment programme. As against the Finance Commission?s target of 4.2% of GDP in 2012-13, the Budget estimates the fiscal deficit at 5.1%. In the process, even the medium-term fiscal policy statement has lost its credibility.
Ironically, the slippage on account of shortfall in tax revenue is not large. The net tax revenue to the Centre fell short by just 2.9%. The problem is mainly due to the inability to contain the subsidies. The revised estimate of subsidies was higher than budgeted by over R72,700 crore in 2011-12, and the Budget for 2012-13 estimates it to be lower than the revised estimate by R26,282 crore. Of course, the finance minister has emphatically stated that the subsidy bill should be reduced from over 2.5% of GDP to 2%. If there is no action plan to achieve this, the subsidy reduction will continue to be elusive. Indeed, there is an urgent need to detail the strategy for achieving the fiscal adjustment plan. The Finance Commission?s recommendation that the medium-term fiscal plan should be a commitment rather than simply a statement has remained only on paper.
The inability to contain the fiscal deficit is a major constraint on economic growth. Equally worrisome is the sharp decline in capital expenditures, which declined from 2.1% of GDP in 2010-11 to 1.8% in 2011-12 and are budgeted at about 2% in 2012-12. In other words, the deterioration in the fiscal situation is seen not merely in terms of slippage in fiscal deficit but also a substantial reduction in capital expenditures. In addition, increase in revenue deficit reflects the quality of public spending, which will result in reducing public savings as well.
This is not to say that there are no positives in the Budget. At last, the Budget makes a switch-over to the negative list in the case of service taxation and, hopefully, this will provide some clarity for the states to determine their revenue neutral tax rates for GST, besides expanding the tax base and revenue. Increase in the excise and service tax rates by two percentage points is important to raise the much-needed revenue. Increase in the excise duty rates on tobacco products too is a measure that will be welcomed, except by the smokers. One would have liked the finance minister to abolish the securities transaction tax and do away with the distinction between long-term and short-term capital gains, but the finance minister chose to only reduce the former. If indeed securities transaction tax had to be continued, it would have been appropriate to tax currency and commodity transactions as well. More importantly, it would have been worthwhile to rationalise the excise duty structure to make a transition to GST. On the whole, this is yet another missed opportunity.