The Hindu : National : Tax reforms to rein in fiscal, revenue deficits

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Friday, Jul 09, 2004

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National

Tax reforms to rein in fiscal, revenue deficits

By Sushma Ramachandran

NEW DELHI, JULY 8. Pledging to reduce revenue and fiscal deficits through deeper tax reforms, the UPA government has declared that the burden of fiscal correction will be shared more by those who can afford to do so in line with its philosophy of "reforms with a human face". Clearly concerned about inflationary pressures on the economy, the Government has also declared that it seeks to work closely with the Reserve Bank of India in this regard. Accordingly, it will continue to issue market stabilisation bonds to stabilise the markets and check inflation by absorbing the excess liquidity caused by the burgeoning forex reserves.

Making these comments in three statements presented for the first time along with the Budget proposals for 2004-5, Finance Minister P. Chidambaram has described the present macro-economic environment as both a challenge and an opportunity. "It is a challenge in terms of the uncertainties in the international capital and commodity markets and rising inflationary pressures. It is an opportunity for policies to enhance infrastructure facilities, both physical and social, pursue reforms with a human face and effect rapid fiscal consolidation," he says.

The documents mandated under the new Fiscal Responsibility and Budget Management Act include statements on the macro-economic framework, the medium-term fiscal policy and the fiscal policy strategy. The Budget estimates, these point out, are predicated on the robust macro - economic environment. The fiscal adjustment proposed in the Budget in terms of reductions in non-plan revenue expenditure growth, is anchored on a sustained benign interest rate regime and stability in prices, it is stated.

The targets set include reducing revenue deficit from 2.5 per cent of GDP in 2004-5 to 1.1 per cent of GDP in 2006-7, cutting fiscal deficit from 4.4 per cent of GDP this year to 3.6 per cent by 2006-7 and raising tax revenue from 10.2 per cent this year to 12.1 per cent by 2006-7. Total outstanding debt is also proposed to be reduced from 68.5 per cent this year to 68.2 per cent next year and 67.8 per cent by 2006-7.

On fiscal policy for the current financial year, Mr. Chidambaram has noted that while moderate inflation is conducive to sustaining the tempo of economic growth, it can cause all-round damage if it goes out of hand. "Inflation hurts the poor the most through the `inflation tax'," he said. In the short term, he has noted, it will also exacerbate the problems in management of external sector with hot money inflows rushing in to cash on arbitrage opportunities.

Regarding tax policy, he it is now time to launch third wave of tax reforms targeted at taxation of services and preparing the ground for introduction of VAT (value added tax). Government intends to move towards integrated taxation of goods and services and bring down customs tariff to levels prevailing in Asean countries. This follows the first generation tax reforms in 1991 which had focused on removing classification disputes and simplification of procedures concerning central excise and second generation tax reforms of 1997 aimed at lowering direct tax rates and expanding the tax base.

As for expenditure policy, he states that the low tax-GDP ratio, debt build-up and high deficits constrain public expenditure though it has been argued that public expenditure as a proportion of GDP is small in India by international comparison.

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