Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: TDS :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: ACCOUNTING STANDARD :: VAT RATES :: Central Excise rule to resale the machines to a new company :: articles on VAT and GST in India :: list of goods taxed at 4% :: due date for vat payment :: cpt :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: VAT Audit :: empanelment :: form 3cd
General »
 Banks warn share tax hike threatens Paris' post-Brexit appeal
 PMC may decide on property tax rebate for IT firms this week
 I-T Dept is giving out certificates of appreciation. Have you received yours?
 Government works on ironing out benefits refund mechanism for exportersa
  Tax officials are using an IDS provision to question transactions beyond six-year-limit
 Tax-free bonds rally like midcap funds
 Senior citizens do not have to pay advance tax on salary and interest income
 GST: Audit commissioners to get adjudication powers
 Interest on NRE rupee account can be exempt from tax under FEMA
 Impact of GST on Real Estate Sector
 GST regime: Tax payers allowed to take option of third-party interfaces

Politics of the fiscal deficit
February, 11th 2010

The main expectation from the forthcoming Budget is that it should prune the fiscal deficit, pegged at 6.8% of GDP for 2009-10. With substantial changes in income and corporate taxes left to the new Direct Tax Code, to be heralded outside the Budget, and major changes in indirect taxes awaiting the proposed Goods and Services Tax, the Budget cannot have any significant tax proposals. What the market would like the finance minister to do is to shrink the fiscal deficit for 2010-11 below 6%, And this, he will deliver. But the point is, how? The answer falls within the domain of politics, not public finance.

The fiscal deficit is the excess of spending over non-borrowed receipts, financed through borrowing. Reducing spending is one way to shrink the deficit; raising nonborrowed receipts is another. Of course, we could have a bit of both.

The biggest chunk of non-borrowed receipts are, of course, tax receipts. Dividend and interest receipts, as well as loan repayments to the Centre also figure, as do revenues from auctioning off telecom spectrum and disinvestment proceeds. While the money the government gets from selling its shares in public enterprises definitely is non-borrowed , it represent a government claim on the publics savings, just as borrowings do, and could strain the availability of resources for private sector investment pretty much as government borrowings do. So, as far as the government crowding out private investment goes, disinvestment and borrowings are like Tweedledum and Tweedledee.

But not from a perspective of future payment receipts/obligations, of course. If the government borrows, it has to pay a stream of interest payments. If it rakes in money by selling government shares, it does not have to pay interest, but forgoes dividend receipts. However, the capitalised value of the dividends forgone would be much smaller than what the government gets by selling its shares in public enterprises . Disinvestment, thus, obviates future interest payments collectively much larger than future dividend receipts forgone, leaving public finances better off than if the government had raised the same amount through loans. If disinvestment leads to better management of the enterprise, via better exposure to market discipline, it could yield more tax revenues as well. But selling shares in public enterprises is a challenging political task, particularly if it leads on to privatisation.

Another way to shrink the fiscal deficit is to reverse the special tax cuts resorted to, in response to the global crisis. This can be done in stages, but again calls for political courage.

The real challenge is in expenditure. While interest payments, salaries, defence outlays cannot be touched, and all programmes aimed at inclusion must continue , there is enormous scope for reducing subsidies, running riot in the absence of political will to curb them. The July 09 Budget put the subsidy figure at 1,11,276 crore, which understated the actual figure by tens of thousand crore. If the government could summon the political will to use at least half this amount for investment , the economy would gain.

The same level of fiscal deficit can have different effects on the economy, depending on how the borrowed resources are used. If the borrowings are 
used to finance consumption, which does not generate revenues, the government would have to borrow yet more in the future to service the borrowing. More seriously, if the borrowing by the government pre-empted private investment and fed consumption instead, overall growth would come down. If, on the other hand, the borrowing is used to finance investment by the government, it would generate revenues that could service the borrowing in the future ; and could crowd in private investment as well.

The challenge before the government is to not just reduce the fiscal deficit, but also to reconfigure its spending, away from consumption to investment. If the borrowed money is deployed in sectors that are strategically planned, the multiplier effect would be higher as well.

An ideal form of public investment right now would be a new capital for Andhra Pradesh, a well-planned , modern city where adjacent high-rise buildings house workplaces, homes, recreation, shopping, etc, minimising commutes and conserving energy. It could be equipped with the finest of public transport, wide roads, carbon-minimising lighting and building technologies.

The point is to plan a new city, parcel out development to private builders, rope in the erstwhile owners of the land on which the city comes up as organised stakeholders in the city, as landlords , service providers, etc. This could be phased in, prioritising some segments so that investment can be kickstarted while the rest of the project gets planned. The pre-requisite , of course, is political will.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - We Bring IT. Offshore software outsourcing company. We use Global Delivery Model (GDM) and believe in Follow The Sun principle

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions