Monday, March 4, 2013

Respected Chidambaram ji

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Respected Chidambaram ji,

 The budget making exercise always challenging, especially at a time when the overall economy is not its pink of health, there exists a real threat of being downgraded to junk status by the international credit rating agencies due to high fiscal deficit, and to cap it, this being a pre-election year. Even though the budget is not the only instrument for effecting overall economic development by the government in the forthcoming financial year, as there could be ‘n’ number of announcements time to time which can have significant bearing on our economy, yet it is the most important instrument to steer the economy in the financial year ahead.

 Even though you had very little elbow room to avoid presenting a populist budget, yet you deserve full marks for gambling on good economics, in the expectation of reaping political dividends later on. You have pegged the fiscal deficit to 5.2% of GDP in this financial year, and 4.8% in the next financial year, and yet you have been bold enough to provide for a 29% increase in plan spending in the the forthcoming financial year. Certainly, this rise in the plan spending is based upon the assumption of very high tax collections to fund the proposed plan spending. To be specific, against a nominal GDP growth of 13.4% it is hoped that the tax revenues will rise by 19 %, a very optimistic estimate indeed. Let’s leave it for the next year to evaluate the actual outcome.

 While there can be no budget which can please each and every segment of our country, and despite doing an excellent job given your constraints, yet I find it tempting to make the following observations for your kind consideration and implementation as and when you deem appropriate:

 Widening the tax base

  You had stated in your budget speech, “When I need to raise resources, who do I go to except those who are relatively well placed in society?” According to your estimates, there are 42,800 individuals in the country whose taxable income is Rs. 1 crore or more per year. You have levied a temporary surcharge of 10% for a year for such super rich.

Theoretically, there is no dispute over the principle, that better-offs should contribute more as compared to others to the state’s exchequer. But, let’s not forget that such super rich also have the privilege of eliciting the services of some of the best tax planners who can bail them out through some creative accounting techniques, thus negating the very idea of such surcharge. Besides, this figure of 42,800 is debatable if we were to include the rural sector as well.

 There could be equal number of such super rich in the rural sector, who do not contribute a single rupee to the state’s exchequer, but are enjoying all the subsidy related benefits. It’s high time that we expanded our tax base by getting such individuals within the ambit of income tax. To make it politically saleable, may I suggest that a Rural Development Fund be created, and all the tax contributions by such super rich farmers, be pooled in that fund with a matching grant from the relevant states and a proportionate percentage by the Centre? This entire corpus should then be exclusively used to create the required infrastructure in the deserving rural areas.

  Employment Generation

 This surcharge of 10% has also been levied on those companies whose annual taxable income is Rs. 10 crores and above. Corporate income tax, the largest contributor to the exchequer fell nearly 4% short of the target set by your respected predecessor Shri Pranab Mukherjee. In rupee terms, this shortfall amounted to Rs. 14,353 crores. What saved things to an extent were taxes on individual incomes and services, which narrowly crossed the estimated targets.

To manage the fiscal deficit target, plan spending had to be slashed in a big way, thereby worsening the quality of the deficit. Given this scenario, it would have been worthwhile to reduce the corporate income tax in inverse proportion to the amount of TDS generated by a company through its regular employees’ salaries.

This would have been an excellent way of boosting employment across industries, something which our economy is struggling to achieve at present. Yes, you have provided an incentive to spend for some manufacturing units by allowing 15% of spending over Rs. 100 crores on plant and machinery in the next two years, qualifying as a deduction. But this benefit can be obtained only by those corporates who have deep pockets and most importantly, can justify the same commercially.

 Indigenization of Military Hardware

  Our defense budget has been raised to over Rs. 2 lakh crores, as we cannot afford to compromise on the overall security of our nation. But considering the fact that we are the biggest importer of military hardware, having spent around $50 billion in the past decade on such imports, it is indeed surprising that no serious thought has been given to boost our own military hardware industry to acceptable international standards, thereby saving such mammoth outgo of foreign exchange, and some years down the line transforming ourselves from the biggest importer to one of the leading exporters of military hardware.

 Specifically, what was required in this budget was a five year tax holiday for all companies engaged in the production of military hardware, besides creating a sizeable corpus, from which highly subsidized loans could be granted for R&D related activities to such entities. If such a move yields the desired results, then some years down the line we could rival China, where foreign exchange reserves are concerned. This would boost the value of the rupee which in turn would cut down our crude oil imports bill in rupee terms thereby further extending us benefits in terms of manageable fiscal deficit.

 Setting up of Cold Storages etc for our Agro based Industry

  Your government staked its survival over the issue of FDI in multi-brand retail, and your spokespersons sold the idea on the basis of a pressing need to plug the estimated 40% wastage of fruits and vegetables due to inadequate cold storage and other facilities in the entire supply chain, besides ensuring a fair price to the farmers and the end consumers by removing as many intermediaries as possible.

 It is a great idea indeed. But what has surprised some of us is the absence of any tax related concessions to our own entities desirous of entering into such businesses.

 Women Welfare

  Nirbhaya Fund to the tune of Rs. 1000 crore has been proposed for the security and improvement of women, besides an all women Public Sector Bank with a corpus of Rs. 1000 crore especially to cater to various needs of our womenfolk While there is no dearth of Public Sector Banks in our country, there are also some women cooperatives banks as well which cater to the desired objectives.

 Hence, it would have been better if the same total corpus of Rs. 2000 crores had been allocated for strengthening our judicial system to dispense quicker justice, which would have been a better way of ensuring security and empowerment of our womenfolk.

 Alternate fuel based technologies

  Given our heavy dependence on imported crude as well as our commitments towards reducing global warming, there is a pressing need to develop automobiles on a large scale which use renewable energy. As a thrust on the same, tax holidays for such companies which are currently producing cars which can run on electricity or any other alternate fuels, and a substantial corpus be created through which loans on highly subsidized rates for such R&D can be dispensed to such entities.

 Disinvestment

  Your government has set up an ambitious target of mopping up Rs. 56,000 crores from the sale of PSU shares, pointing to increased reliance on disinvestment to bridge the deficit. This target is for the next financial year, and is more than double that the government plans to mop up during the current fiscal. It includes the residual stake in Balco, Hindustan Zinc, besides MMTC and BHEL. All these are blue chip companies. Is it necessary to “sell family silver for covering one's debt”?

Certainly, this deficit once bridged through stake sale is likely to resurface some years down the line, given the competitive populism which is hall mark of our polity. Kindly explore ways to make such blue chip PSUs more profitable thereby generating more dividends for the government, which then can be used to bridge the deficit gradually. Removing unnecessary government interference in their functioning besides the requisite autonomy and accountability to its senior management could be among some of the measures you might consider for all the PSUs and the dividends so generated would be amazing indeed.

Misuse of Subsidies

 And finally, every year huge amounts are being earmarked for various subsidies. While reduction in subsidies is politically sensitive, yet a strict monitoring of its end use is fiscally prudent. In this connection, may I draw your attention to the decision of IFFCO Board to grant a special incentive of two of its prime properties in Delhi with 40-50 crores each as per media reports to two of its top honchos. According to the news item, IFFCO's 2011-12 annual reports, it received Rs. 14,464 crores or 57% of its turnover of Rs 25,600 crores as government’s subsidies for fertilizers.

According to a press released by the company the following day, IFFCO maintained that the government had no stake in IFFCO and hence those two properties did not belong to the government. As for the lavish subsidy amount of over Rs 14,000 crores or 57% of its turnover that it gets from the government, IFFCO said this was only as per the government policy of compensating fertilizer companies for selling at a loss. If that be so, then how come the company was so generous to gift two of its prime properties worth a combined 100 crores or so to two of its honchos?

This is just one classic case of gross misuse of subsidies by entities like IFFCO. This may also be just tip of the iceberg waiting to be discovered by your administration. Why should we tax payers pay a portion of our hard earned money to facilitate such generous payouts by such irresponsible entities?

 Kindly consider these observations accordingly, and wishing you all the very best in your endeavours.

Respectfully,

Navneet Dhawan

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