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Four things the FM needs to address in Budget 2012

There are four things that finance minister Pranab Mukherjee must do in Budget 2012.

india Updated: Mar 09, 2012 20:55 IST

There are four things that finance minister Pranab Mukherjee must do in Budget 2012. The starting point, of course, must be fiscal consolidation. The budget Fiscal Responsibility and Budget Management Act of Parliament passed in our time was thrown out of window by the UPA. As far as the economic crises goes, my take is that it was more importantly the elections in India which led to that bonanza of 2008-09 budget. In absolute numbers, the fiscal deficit that year was allowed to go up Rs 210,000 crore in one year. In one year if you push that much of money it is alarming. The government very conveniently used the umbrella of the global financial crisis to take liberties with the fiscal deficit. If you look at the stimulus, they merely reduced excise duties. The rest of it was nothing but election-oriented expenditure, like 6th Pay Commission, farmers’ debt waivers, and increased allocation on Mahatma Gandhi National Rural Employment Guarantee.

All this resulted in huge consumption expenditure. And when you have consumption expenditure of this volume, it’s bound to have an impact on inflation. All this could have been easily predicted. Any economist who would have studied the subject in higher secondary would have told you that if you run a fiscal deficit of this kind, especially on consumption expenditure side and not on investment expenditure side — which cannot be rolled back once crises are over year on year — will put pressure on prices. Inflation will go up. As a result, the Reserve Bank of India will have to increase interest rates and liquidity. The current slowdown of GDP growth to 6.1% is on this account.

Second, he must correct the near complete neglect of housing by the government — the immediate impact of higher interest rate and liquidity squeeze — which had an adverse impact on the sector. Globally, the housing sector has been recognised as one of the strongest triggers of economic activity. Our government recognised and encouraged it. Despite the high inflation we experienced in the past four years, for instance, rebate for housing interest in income tax stays at Rs1.5 lakh, which was fixed by us 10 years ago. This must be revised. He must also come with a package of fresh incentives for individual house owners and real estate developers. Third, the finance minister needs to catalyse infrastructure like national highways, rural roads, freight corridors. We need more toll roads. The government must carry out study on areas and projects that are commercially viable. Railways, ports, mini airports and petroleum are among the areas that need attention. As far as PSUs are concerned, there is a well-defined concept of internal rate of return that tells us whether a project is viable for the next 12-15 years. Here, the government’s responsibility should be confined to merely to provide seed capital through special purpose vehicle (SPV). We must start using SPVs even for construction of private multi-storied buildings, so you can delink them from not only the government’s budget but also from the parent company.

All these projects should be financed to the extent of seed capital and the rest should come from the market.

Finally, the finance minister must focus on economic reforms that have been held over, like Direct Taxes Code, and Goods and Services Taxes (GST). There is no reason to hold the GST. It must also subject all populist schemes of the government, like NREGS, Rajiv Gandhi Grameen Vidyutikaran, NHRHs to zero budgeting.

The author is chairman of the Parliamentary Standing Committee on Finance, and a former finance minister.