Sticking to basics is the way to go

India’s new finance minister Arun Jaitley is gearing up to present his maiden budget for 2014-15 in early July. The change of guard in North Block might only appear to be one lawyer replacing the other. What is common to P Chidambaram and Jaitley is that both have represented corporate interests in their professional capacities and have a realistic sense of what it is good for business. The challenges are also similar. Chidambaram, as finance minister for the third time, sought to revive investor sentiment and boost growth. So, too, does, Jaitley.

The current finance minister, however, faces a far more difficult situation as he has limited fiscal room for manouevre. With overall growth in a free fall, there isn’t any buoyancy in tax collections to fund necessary spending. Non-Plan expenditures on subsidies like diesel, LPG and food are high and rising. The government perforce has to borrow more and more to meet routine housekeeping expenses. In fact, two-thirds of such borrowings are to meet such expenditures. From where, then, will budgetary surpluses be generated to kick-start growth?

The new finance minister has met agriculturists, industrialists, among others, and informed them that his priorities are fiscal consolidation and reviving the economy. For starters, the state of finances inherited from the outgoing UPA government is a source of serious concern. There are “a lot of unpaid bills” – in Jaitley’s words — due to the deferring of subsidy payments to oil marketing and fertiliser companies. If the unpaid food subsidy is also taken into account, this subsidy burden that has to be borne in 2014-15 will be as high as Rs 1.10 lakh crore.

Besides the dodgy fiscal numbers, the worst legacy that he has inherited from the UPA government is the aggressive approach of tax authorities to meet revenue targets. Chidambaram promised to create a non-adversarial and conducive tax environment. But he failed to do so. The list of foreign companies slapped with transfer pricing violations is a growing one. Transfer pricing relates to the determination of the correct market price at which multinational corporations and their subsidiaries transfer products, services or assets across borders.

India currently has the third highest number pending transfer pricing disputes in the world. No amount of visits abroad by the previous finance minister to London, Singapore and Hong Kong could assure nervous investors regarding the attractiveness of India as an investment destination. Investor sentiment took a serious beating also with the powers of authorities to reopen tax cases going back to 1962! Vodafone has sought international arbitration to resolve its tax problems in India. The list will be growing unless Jaitley does something about it.

All eyes thus will be on the forthcoming budget as to whether it sends the right signals to assure both foreign and domestic investors. Whether retrospective tax provisions – that targeted companies like Vodafone –will be reversed in the Finance Bill. The budget is much more than a fiscal exercise of estimating revenues and expenditures and balancing them. Especially since the 1990s, it is also an

occasion that the finance minister signals the

policy stance of the government, including its

reform agenda.

What sort of reform is now likely? The ones that occupy the attention of the business press are largely on limits on foreign direct investments in sectors like insurance, multi-brand retail and defence. The thinking of the Modi government in this regard appears to be ensure that ownership and control remain in Indian hands, but allow a 49 per cent FDI limit in most sectors, barring a few like multi-brand retail, without requiring time-consuming approvals. The forthcoming budget would indeed be the best platform to articulate a clear and transparent policy on FDI.

On reform, the track record of the BJP when it was in power during 1998-2004 was indeed a bold one.  It went further than even Congress-led governments in some respects. For instance, no Congress-led coalition could aggressively disinvest or privatise public sector companies like Maruti and VSNL.  All that it could do was resort to partial sales of equity of public sector entities to meet current expenditures. The BJP-led government went the whole distance and ensured change in management control to the likes of Osamu Suzuki and the Tatas.

With such a precedent, Jaitley is unlikely to be inhibited in resorting to an aggressive disinvestment/privatisation strategy to mobilise resources.  The stock market is on fire. This is a good time to offload equity of public sector scrips. There is also speculation that Coal India Ltd’s monopoly might be broken. It is strange that the country has one of the largest reserves of coal, but must still resort to costly imports from Indonesia and Australia. This is also a good juncture to make a call on the fate of Air-India, the nation’s flagship carrier.

Without selling the family silver, the right way to raise resources, however, is to rein in non-plan revenue expenditures by carefully targeting the subsidy programme and trimming wasteful ones. Raising taxes through simpler rates and better compliance would ensure that revenues fund expenditures and generate a surplus. These internally generated budgetary resources, rather than borrowings, can truly kick-start growth through greater public investments in highways, ports, bullet trains and so on. In addition, the new finance minister must set a realistic roadmap for fiscal consolidation after putting out more credible fiscal numbers. There won’t be a sovereign downgrade for doing all of this and more.

Expectations naturally are building up regarding what the budget will or will not convey. It is enough if one lawyer can deliver what another couldn’t. Investor sentiment will revive if there is greater clarity in tax laws, a stable tax regime and a fair mechanism for resolving disputes. It is these signals that are bound to be tracked by foreign and domestic investors. Re-kindling their animal spirits is vital for boosting growth. There is no point delivering so-called dream budgets that mask fiscal nightmares. Jaitley’s first budget is well-advised to stick to the basics with a clear roadmap for putting the nation’s finances in order.

(N Chandra Mohan is an economics and business commentator based in New Delhi)

N Chandra Mohan

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