Maintaining a fine balance: Rajiv Kumar

The Finance Minister has done well to leave direct tax rates unchanged, writes Rajiv Kumar, Director & Chief Executive, ICRIER.

The Finance Minister has been able to achieve a fine balance between coalitional pressure for increased social expenditure and maintaining fiscal prudence and bringing the budget on track for achieving the FRBM targets. But perhaps at the cost of sub-optimal level of public sector capital formation. The budget optimistically assumes that the existing infrastructure deficit will be addressed largely by private investment which is clearly on a cyclical upswing.

The most common rate of (so called peak) duties has been brought down to 12.5 per cent but all those above this rate, currently ranging from 20 to 150 per cent in 14 different slabs have been left untouched. The budget marks strong effort in achieving the stated objec tives of the minimum common programme and allocates significant resources for rural employment guarantee scheme, health and education sector, the national urban renewal programme etc.

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The focus on rural infrastructure development and on improving resource transfer to agriculture sector through interest subsidies, interest rate burden write off and greater allocation of commercial bank credit is welcome as this will reduce the dichotomy between Bharat and India. This will also generate consumption demand to keep industry's top and bottom line health. With all these additional outlays on popular measures that will keep coalitional partners happy, the finance minister could have used the goodwill so generated to push for some bold measures like addressing the subsidies burden on the budget; rationalising the petroleum price and tax structure and opening sector like coal mining and retail to foreign investment.

But these will perhaps have to wait for another day and a less politically charged environment. The finance minister has done well to leave direct tax rates unchanged. This will consolidate the gains made so far and help focus attention on more effective tax administration, measures to improve compliance and widen the tax net. This will perhaps give the necessary impetus to CBDT to increase the number of taxpayers who declare their annual income to be above Rs 10 lakh, which currently are less than 0.1 per cent of the population.

The writer is Director & Chief Executive, Indian Council for Research on International Economic Relations (ICRIER)