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Debts can dip on tax reforms
November, 29th 2007
The deficit of the Indian budget is slowly getting diminished as tax collections are improving every year coupled with better management of finances.
 
While the fiscal deficit was at 4.1 per cent of the Gross Domestic Product (GDP) during 2005-06, according to estimates for 2007-08, it is bound to drop to 3.3 per cent.
 
Tax revenue that was at Rs 2,70,264 crore during 2005-06 is projected to jump to Rs 4,03,872 crore according to budget estimates for 2007-08. If the current trend is maintained, it may pave the way for a surplus within the next five years.
 
The deficit is largely being financed through the issue of government bonds of fixed tenure. The rates, which ruled at 13-14 per cent a few years ago, have dropped substantially to about 8 per cent now. Interest payments that were at 26.21 per cent of the total expenditure in 2005-06 is expected to drop to 23.36 per cent this current year.
 
But this does not mean that the government can continue to borrow just because the interest outgo is reducing. Typically, a surplus can be put to three alternative uses by the government - increase spending, reduce taxes, retire debt.
 
Though successive governments have promised rationalisation of the tax structure, there is a definite disinclination on the part of the government to bring down taxation levels.
 
Undoubtedly, reduction in the debt burden would provide the government with some definite relief.
 
Considering that the bonds are invariably refinanced, retirement of these debts from out of the surplus will mean lesser need to raise new debt. This will in turn simulate the economy and improve growth opportunities.
 
It is the third alternative that the government would do well to do some thinking on. The terms of the bonds that are now being issued do not provide for early redemption of the bonds.
 
As and when the budget shifts to the surplus mode, if terms do not permit for early redemption of the bonds, the government will be forced to pay interest on such bonds when it could very well redeem the bonds through the surplus, since the exit route is blocked.
 
P T Kuppuswamy
(The author is the chairman and managing director of the Karur Vysya Bank)
 
 
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