1. Q: What do you believe are the most critical issues that the FM should be focusing on when he delivers the budget?A: The critical issue is to restore economic growth. To do this, two central problems have to be addressed in the budget. One is the Fiscal deficit and the other is revival of private investment.
2. Q: This is the last full year budget before next year’s general elections. Do you worry about populist measures being announced?
A: There is still time for another pre-election budget in 2014. The 2013-14 budget should focus on the revival of investment and growth, leaving any “populist” measures to the next budget.
3. Q: The government finances are a mess. We’d be lucky if the fiscal deficit comes in at 5.3 per cent as the FM has promised it will. The CAD is set to end this year at a record high. But would you say the progress made by the FM in the months since he took charge give you reason to believe that we are on the path to recovery?
A: The administered price changes announced by the government during the last four months are a good beginning, but they are just that a beginning. The next critical step is the budget. More important than the precise number for the current year (5.3% or 5.4% of GDP) will be the steps taken to put government consumption, subsidies and transfers on a firm trend to fiscal deficit reduction. Further action will also need to be taken to reassure tax paying investors that a simple, broad based tax structure that promotes voluntary compliance is still the objective of the finance minister, and not “revenues at any cost.”
For instance, measures introduced in the last budget to tax equity investment in new entrepreneurial ventures as hypothetical unrealized capital gains is against the logic and practice of capital gains taxation. This should be completely and unambiguously removed for young, small scale entrepreneurs who are trying to obtain funding from venture capitalists.
4. Q: High fiscal deficit has supported consumption but crowded out investment. Isn’t this growth composition a self-defeating one?
A: Yes. The rate of growth of investment during 2008-9 has fallen dramatically from that attained during 2003-4 to 2007-8. At the same time government consumption and government transfers and subsidies for private consumption have increased during 2008-09 to 2011-12. Though the objective of the government was to promote inclusive growth and poverty alleviation the collateral damage caused to growth was insufficiently understood and appreciated by policy advisors, policy makers and even private industry (till 2011-12). The focus of expenditure needs to be reversed.
5. Q: Has enough been done on addressing supply-side bottlenecks? What would you like to see as first steps by the government?
A: Much more needs to be done to address supply-demand gaps in Agriculture (APMC, ExIm regime), Energy (pricing, subsidy), Minerals (Exploration, auctions), Land – Rural (LAA, R&R), Urban (land use, market) and skills (certification, training of trainers, rural youth).
6. Q: What should be the more immediate priority – revenue enhancement or quality of expenditure?
A: Expenditure reduction has to be the immediate priority. It will allow an equivalent easing of monetary policy and thus support investment and growth. In contrast revenue enhancement will add to and worsen the dis-incentives for investment. This is particularly true of short term, “revenue at any cost” measures that have additional negative effects on sentiments and “animal spirits.” An improvement in the quality of both taxes and expenditures would enhance efficiency and growth, but the macro economic situation requires a sharp reduction in expenditures coupled with a dramatic easing of monetary policy.
7. Q: India’s fiscal deficit one of the highest among high growth economies. Would you put this down to high government spending or weak revenues, especially our low tax base?
A: India’s fiscal deficit has historically been among the highest in the world, not to speak of high growth economies. However, by 2007-8, t he central (national) fiscal deficit was reduced to 2.5% (4%) of GDP in 2007-8, a highly creditable performance, even in a global perspective. The global financial crisis of 2008, changed this trajectory, by necessitating a fiscal stimulus (of 2.5%) to offset the dramatic fall in private demand.
The V shaped recovery of growth to 8.2% in 2009-10 justified this stimulus but was also an argument for cutting back the deficit over the next two years to the 3% prescribed by the FRBM. Unfortunately, the fiscal stimulus was increased, with little protest from economic experts by an additional 0.5% of GDP (to 6.5 % of GDP) in 2009-10, so it became impossible to bring it back to 3% by 2010-11. This was driven by 2.2% of GDP increase in revenue expenditure and a 0.8% of GDP increase in subsidies. Restoring subsidies and other revenue expenditure -GDP ratios to those achieved in 2007-8 will help bring down the fiscal deficit and restore growth and tax revenues to earlier levels.