When finance minister Pranab Mukherjee presents his Budget today, it will finally come down to managing three big problems — keeping inflation low, keeping growth high and keeping corruption in check.
The biggest of them, inflation, is perhaps beyond his scope, or for that matter, any other minister in any country. Commodity prices are surging across the world, and volatile politics in West Asia will keep oil prices high.
Worse, while food prices surged to new historic peaks last month — for the seventh consecutive month, according to the UN's Food and Agriculture Organisation. While we await the latest data this week, it is clear that that India is seeing structural changes in the consumption of food. Protein-rich food such as milk, eggs, pulses have seen their prices rise faster than overall food items — milk is up 24.6%, eggs, meat and fish by 31.2% and fruits by 19.0%.
Other than lowering import duties on food and excise duties on processed foods, there is little Mukherjee can do about fixing this in the short-term. Any solution he comes up with — giving incentives to cold storage chains, a fillip to foreign direct investment in retail and so on — will come into effect only over the next five years.
Food inflation is now overflowing into non-food inflation and that’s where the great Indian growth story could take a hit. As far as companies are concerned, most of them will pass on the expected 2% increase in excise duties to consumer. In this era of voracious consumer demand, rare will be the company that will take a hit on profits in order to keep inventories flowing. Increasing excise duties is also a fiscal compulsion --- Mukherjee needs to keep public finances under control.
But Mukherjee is not fiscally helpless. One way out is for him to cut customs duties on crude oil by 5 percentage points to 2.5%. Additionally, he can reduce excise duties on petrol and diesel by R1 each. This will lower the cost of fuel in the economy and keep inflation under some check, for some time. I don’t buy the arguments of some smart economists who say that oil price cuts cause greater wastage — it is an argument of the elite.
The total loss of revenue on these two counts will be R23,000 crore, with benefits of lower prices seeping across the economy in the immediate term.
Mukherjee can make up most of this loss by taxing services. By increasing the number of services that are under the service tax ambit — as is expected —he could enlarge the tax base of services that contribute 60% to GDP. By raising the service tax to 12% from 10%, he will be able to get more from the existing base. Together, he can hope to collect R20,000 crore, just about enough to make up for the loss on fuel taxes.
What he needs to be careful about is not to hurt the unorganised services such as carpenters and plumbers. But doctors and lawyers — why not?
On the corruption front, more than anything else, Mukherjee needs to initiate governance reforms. According to government data, half the black money generated and circulated in the economy comes from property deals. Property is a state subject and the last bastion of corrupt politicians. But capital gains from property, and its accurate valuation, are central subjects. You just have to look at classified ads to guess what the minister can do.
The budget should announce an enforced collection measure on all property deals. That is, if the government feels a deal is undervalued, it should have the right to come in and buy the property at the price it is being officially transacted. Such a clause used to exist in the past and there is dire need to reintroduce it.
Second, any abuse of this authority by tax officials should carry heavy penalty, including dismissal. Do this in 10 deals, one city at a time. Publicise it. And in six months we can expect relatively cleaner property transactions.With revenue gains to match.