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Budget 2007: Time for key initiatives
February, 06th 2007

In presenting the Budget, it is common for finance ministers to first narrate the expenditure allocations to enthuse citizens and their elected representatives and prepare them for the bitter pills to come new or increased taxes and fresh bouts of domestic and external borrowing. Every Budget has its suspense and drama and that is why it is one annual event to wait for, especially in regard to new initiatives, policies and programmes.

India has a strong economy; tax revenues are on the rise; foreign exchange reserves are in great shape (though I prefer less of the component linked to short-term flows); for the first time ever, foreign direct investment could cross the $10-billion mark; for longer term, everybody is talking about the demographic dividend; and in case one needs external certification, Goldman Sachs recently released the most upbeat assessment on India's economic future.

Inflation worry

Yes, there is the inflation worry, but that is best left to the Reserve Bank of India, as expenditure compression, especially by reducing government employment, is unthinkable when coalition Dharma has to be respected.

Budget 2007 is coming when the United Progressive Alliance Government is at the halfway point of its tenure. Though elections are two-and-half years away, it makes lot of political sense to take initiatives that are intrinsically good and also aimed at pleasing the electorate.

So what will the Finance Minister, Mr P. Chidambaram, serve up?

The `best half' of the electorate will watch for one of the key promises made in the Common Minimum Programme (CMP) "To fully empower women politically, educationally, economically and legally". While Budget 2007 can do precious little vis--vis political empowerment, it can surely announce and fund well-thought-out initiatives on the three other dimensions.

Allocation for education

On the education front, for example, two measures are urgently needed. First, the overall allocation for education must go up significantly, if the so called demographic dividend is to be translated into a skill and knowledge dividend. In addition, special measures are needed across the board to strengthen women's participation at all levels of education. A few more women's universities may be thought of.

Then there is the CMP promise that "The UPA makes a solemn pledge to the people of our country: to provide a government that is corruption-free, transparent and accountable at all times... " It is a difficult promise, given that the government is vast, detection of corruption is weak and the punishments are meagre. Budget 2007 could allocate funds for a large-scale expansion of the anti-corruption machinery, with stringent punishments for corruption.

Everyone knows where corruption thrives. It is those areas that need to be tackled effectively. There have been numerous suggestions for blocking the avenues for creation of black-money; the Budget must dwell on them and initiate actions.

The UPA Government could also win the hearts of all honest income-tax payers by eliminating middlemen in electronic filing. The Government should announce that all PAN cardholders can electronically request for individual passwords; receive them by special mail from the income-tax authorities; and then all those filing tax returns electronically and paying tax via automatic debits to their designated bank accounts would get a five per cent rebate in the total tax payable. The tax authority will then easily know where to spread the investigative net.

Levy on car purchase

I have one bitter pill that is worth looking into in Budget 2007. This is a special levy on new passenger car purchases. Automobiles are clogging roads, adding to pollution, raising oil consumption and, worst, causing accidents. Tax-payers may not grudge paying a modest amount that will be used exclusively to fund road development, with special emphasis on pedestrian crossings, under-passes, over-bridges and footpaths along main roads. This `Road Development Levy' could be in two slabs of 5 per cent for cars with an engine capacity of less than 1200 cc and 10 per cent for the rest. Tax collection can be by the vehicle seller and payment should be via automatic transfer to a government bank account.

For entrepreneurs and businessmen, Budget 2007 could go for just two rates of import duty 5 per cent on all raw materials and capital equipment and 10 per cent on all others. Liquor and tobacco products should attract 100 per cent duty, while VAT can be reduced to a uniform 10 per cent. These `discounts' are justified as economic growth has been good and generally pushed up tax revenues.

Forward-looking Budget

All these can form part of a forward-looking Budget. But there are other measures that need the attention of the Finance Minister. These include the eventual phasing out of the Central Sales Tax, a slight moderation in the corporate income-tax rate, further widening of the tax base, elimination of all exemptions for individuals except savings in pension funds and life and health insurance, complete removal of exemptions applicable to corporate donations, raising the provident fund rate to 15 per cent and announcing how and when it will reach a target level of 20, and, of course, the Fiscal Responsibility and Budget Management Act and the obligation of the government to rein-in the fiscal deficit.

Exchange rate regime

Considering the strong economic fundamentals of the nation, the Finance Minister could, in Budget 2007, announce the appointment of a high-power committee to look at the exchange rate regime, look at how it compares with those of our key trading partners, see if it is worth going back to a fixed exchange rate regime and if so what could be the most desirable game plan. China is reaping the advantages of its almost-fixed exchange rate regime. This frees its businesses to focus on production, productivity and exports, rather than agonise over currency hedging and speculative games.

After all, as Lord Keynes wrote, economics is not a settled body of conclusions. There is no harm in re-visiting the old wisdom once in a way, and checking if it holds any promise for these modern times.

Bhanoji Rao
(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam, and Visiting Faculty, Sri Sathya Sai Institute of Higher Learning, Prashanti Nilayam.)

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