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Economist Or Politician?

Updated: February 27, 2010 1:28 pm

This is the time of the year that all eyes are focused on the finance minister. The finance minister in turn has to make the big choice: allow the politician in him to dominate the economist or vice versa. If one were to go by what he did last time in his inaugural budget in UPA 2, the politician is set to use the opportunity to make yet another grand statement of intent all aimed to woo the common man, at times ignoring the ground macro economy situation as it obtains today.

            Pranab Mukherjee, a veteran politician that he is, knows pretty well that his constituency is not a bunch of economists fretting over rising fiscal deficit. So get set for a spate of grandiose announcements on increased government spending on various politically correct schemes. But as he keeps close to his heart the big picture to be conveyed in the budget, the finance minister has got busy over the past fortnight or more taking patient calls from a wide spectrum of the society on the budget wish list.

            As the budget clock gets ticking, let us take a look at the ground situation as also what agenda the Indian industry has for the finance minister. By and large, the industry would like him to be soft on it, especially since it is just experiencing green shoots. The industry has made a concerted pitch for continuation of the stimulus package announced last year by the government that the industry believes shielded India from the onslaught of the global economic tumble.

            The macro economic overview today shows that while India withered the influence of the global financial crisis much better than the economies of the west, it did face a considerable slow down in its growth performance particularly in the last two quarters of 2008-09. Despite the adverse conditions faced due to the liquidity crunch, decline in demand for exports and the sharp pullout of FIIs and FDI, Indian economy grew at an average rate of 6.7 per cent in 2008-09. This is in contrast with the 9 per cent growth trajectory, which the economy achieved during the previous three consecutive years. Owing to the various monetary and fiscal stimulus measures taken up by the government to support the economic activity, Indian GDP grew steadily about 2 per centage points from 5.8 per cent in Q4 of 2008-09 to 6.1 per cent in Q1 of 2009-10 and further to 7.9 per cent in Q2 during the current fiscal.

            However, the agricultural sector continues with its weak growth of 1.6 per cent during 2008-09. As per the latest figures, the sector’s growth further declined to 0.9 per cent during second quarter of 2009-10. Poor monsoon in some areas and flood in some other areas seems to be the factors responsible for the feeble agricultural growth. Though the industrial sector showed a significant dip to 3.9 per cent growth during 2008-09 from 8.1 per cent in 2007-08, the second quarter figure of 2009-10 shows signs of hope by clocking a 8.3 per cent growth. Though the service sector growth dipped to 9.7 per cent in 2008-09 from 11.2-growth rate during 2007-08, this sector still keeps its growth rate above 9 per cent as per second quarter of 2009-10, for which latest data is available. The industrial and the service sector are reviving on the back of the stimulus packages the government announced during the time of global crisis.

            Defying the fiscal responsibility and budget management (FRBM) act 2003, the Indian government witnessed a fiscal deficit of 6.2 per cent in the year 2008-09 owing majorly to the global financial crisis and to the measures taken to contain its impacts. The budget estimate for central government’s gross fiscal deficit in 2009-10 is 6.8 per cent. The other two key deficit indicators also registered a rise. The revenue deficit and the primary deficit increased to 4.6 per cent and 2.6 per cent respectively in 2008-09. The budget estimate for the revenue deficit in 2009-10 is 4.8 per cent and for primary deficit is 3 per cent.

            What should the Union Budget 2010-11 focus on?

            According to FICCI, the stimulus packages announced by the government in the context of global downturn fortified the country and enabled it to suffer less of an impact than many other countries. With regards to the problem of high fiscal deficit, the government can resume back to its FRBM targets once again after the economy has recovered well from the crisis and reform measures have been taken up to boost the economy. And as far as high inflation rates, it can be clearly said that the inflation is of a structural supply side kind of inflation mainly due to high price of primary products such as food prices. Thus industry in consensus voice is of the view that it is too early a time to bring in a restrictive monetary policy and to abandon the fiscal stimulus measures announced to reactivate growth triggers.

            The income tax rate of 33.99 per cent (inclusive of surcharge and education cess) on income of Rs. five lakhs and above casts a sizeable burden on the middle class, reducing the surplus in their hands for consumption spending. It is noteworthy that the peak rate in other countries is attracted at a significantly higher income slab and the threshold limits being much more, resulting in effective rates being lower than that in our country. To illustrate, the effective rate on US$ 1 lakh for individual assesses is 9.3per cent in Singapore, 10 per cent in Bulgaria, 10.5 per cent in Hongkong, 12.8 per cent in Costa Rica, 13per cent in Russia, 13.4 per cent in Romania, 15 per cent in Czech Republic, 19 per cent in Pakistan, 19.3 per cent in Egypt, 21.6 per cent in Malaysia, 22.7 per cent in Brazil, 25.3 per cent in Mexico and 29.2 per cent in Canada, whereas in India it is 31.5 per cent. It is in this comparative tax scenario, there is strong demand for income tax slabs be considerably rationalized and enlarged, making the maximum rate of 30 per cent (ideally to be reduced to 25 per cent) applicable over an income of Rs.25 lakhs, with 10 per cent upto Rs.10 lakhs and 20 per cent between Rs.10 lakhs and Rs.25 lakhs. While this could be done over the next 2-3 years, the maximum rate be made applicable over an income of Rs.10 lakhs in the ensuring budget. This would result in more surpluses in the hands of the individuals, causing more consumption spending and thus more demand of products in the market, thereby also giving a fillip to the industrial growth, which has been adversely affected by the ongoing economic recession.

            For corporate sector, the industry wish list pleads that companies be facilitated to have more investible funds for expansion and diversification, by reducing the corporate tax burden. The corporate tax rate at 33.99 per cent is considerably above the global average corporate tax rate of 25.51 per cent, i.e. even more than 8 per centage point higher than that of the global average: And this, without adding the impact of dividend distribution tax. What is particularly noteworthy is that the global average corporate tax rate has been coming down over the years. All these will need to be given a re-look with a view to making our corporate globally competitive. There is no gainsaying that a conducive tax regime will help our country being viewed as a preferred investment destination, they argued.

            As regards manufacturing, the industry argued that growth process of our economy should be driven by the manufacturing sector that has immense potential to provide employment to our large labour force trapped in the agriculture in an unproductive manner. In order to achieve this, more needs to be done for the manufacturing sector. FICCI and CII have over a period of time wanted a manufacturing policy for the country for making the manufacturing growth central to the growth process of the country. The share of manufacturing in our GDP should be increased to 25 per cent by 2015 and the growth rate of the sector should be enhanced to 12 to 14 per cent per annum for a sustainable period in the long run.

By K Anjna

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