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Fiscal deficit is the issue in pre-budget parleys

Neena Haridas in New Delhi

Price hikes? Duty restructuring? Slash in subsidies? These are just a few of the apprehensions of the Indian industry as the finance ministry gets ready to table the Union Budget in February 2000.

What will the first Union Budget of this millennium have in store for the economy? It could well be a tightrope walk for Finance Minister Yashwant Sinha, considering the grim situation that the country has landed itself in, thanks to the Kargil conflict and the general elections.

As Sinha himself reiterated when he took office, the agenda this year will be to curb the rising fiscal deficit. He had said, "We cannot live with this level of fiscal deficit. We need to have a medium term programme to curb fiscal profligacy. There are pressures other than Kargil, which have to be tackled. See the trend in the last few years and it is clear that there is a big problem. What we need is a medium term strategy that will bring down the fiscal deficit to about two per cent in the next three years."

And to meet this target, Sinha had hinted that the government will be taking some tough measures this year. He had ruled out any soft option and had reiterated that the current levels of fiscal deficit were not sustainable.

It may be recalled that the fiscal deficit at the end of August 1999 was rising by 26.2 per cent as compared to the targeted rate of 6.9 per cent of the GDP. At the end of the current fiscal year, it is estimated to be about 5-6 per cent of the GDP. The reason for the steep fiscal deficit this year is being attributed to the expenses incurred on account of the Kargil conflict which was then followed by general elections.

Says Tarun Das, director-general, the Confederation of Indian Industry, "The figure is not surprising because expenditure was growing at 17 per cent as compared to the target rate of 12.2 per cent and tax revenues (at the end of September 1999) were rising at 13.3 per cent as compared to the required rate of 18.9 per cent. The expenditure went up further on account of election expenses (Rs 10 billion), dearness allowance to government employees (Rs 13.19 billion) and enhanced food subsidies.

"Hence, the only option left at the North Block is to mobilise additional resources. Though Sinha has discounted a 'Kargil tax', the ministry aims at additional resource mobilisation through divestment."

Hence, economists feel the budget this year is likely to be skewed towards divestment as the government sees this as a source of resource mobilisation. In fact, the government has set itself a Rs 100 billion divestment target. The resources so mobilised would be utilised to tide over the immediate fiscal problem facing the country.

"India is now ready for divestments and to convert our public sector units into real asset, the government must divest its share to below 50 per cent. Personally, I prefer the government to hold not more than 20 per cent. Divestment will help perk up the government kitty, bring back people to the capital market and create an environment for better management for the PSUs," says CII's Das.

Says Dr Surjit S Bhalla of Oxus Research and Investments: "Divestment could be used as a solution to tide over the fiscal deficit problem. In any case, divestment is long overdue in the country as it not only drains the government of resources -- but it does so without any results. Most of the PSUs have been referred to the the Board for Industrial and Financial Reconstruction (BIFR)."

Another source of resouces mobilisation, according to Bhalla, is to go in for additional tax levies. However, CII's Das says, "A better option would be to introduce measures aimed at better tax compliance. Even though the government introduced the Voluntary Disclosure Income Scheme, there has not been much increase in the total revenue from direct taxes. Hence it would be a better idea to just increase tax compliance."

According to a Comptroller and Auditor General of India report, though the actual collection of direct taxes increased by 24 per cent from Rs 388.95 billion in 1996-97 to Rs 482.80 billion in 1997-98, the increase was only due to the collections amounting to Rs 95.54 billion under the VDIS-97.

But for the VDIS collections, the total tax collection decreased by Rs 1.68 billion (0.43 per cent) as compared to the previous year. The ratio of the direct taxes to the GDP was 3.4 per cent. The cumulative arrears of direct tax, according to the CAG report, has increased from Rs 335.85 billion in 1996-97 to Rs 412.30 billion, representing an increase of 23 per cent.

Says KP Singh, president, the PHD Chamber of Commerce, "Mobilising these tax arrears is necessary for the government to achieve the revenue targets for the current fiscal year."

Says a consumer electronics industry source, "We fear that the taxes might be increased because of the fiscal deficit. We wish the government would rather not hike the corporate taxes as the industry is still on the recovery phase."

Meanwhile, economists fear that there could be price hikes that would hurt the common man. For instance, the price of liquified petroleum gas is likely to be raised by 33 per cent while kerosene prices might go up by 15-20 per cent.

However, Jaydeep Ghosh, senior professor, Delhi University, says, "But I think there could be some feel-good measures too from the FM. Most likely there will be something for agriculture industry. Since there are moves to de-regulate the sugar industry and the likelihood of a new agricultural policy, the budget will have at least a few populist items on it."

Says a Ficci spokesperson, "We think the government knows the issues that it must attend to in this budget. There are severe economic problems and there is no way we can ignore these to become popular. There could be some tough measures but they might be necessary. Steps should be taken to bring more foreign investments."

CII's Das thinks the reason for dwindling foreign investment is lack of transparency in many of our policies. "The government still clears investments on a case-to-case basis and the investor keeps jumping from department to the other. India's foreign investment policies should be made more transparent and should available for the investor abroad for reference on the Internet. We must move ahead with time and technology. If the investor is aware of the rules and regulations and functions accordingly, there is less time wasted in granting permission."

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