The just enough budget
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The budget has become something of an annual fiscal exam for spendthrift democracies around the world. In the age of globalisation, India finds itself in good company, that of the United States and a number of European nations, in trying to convince investors and creditors that it can skirt the fiscal cliff. Recent news in India has been alarming, with slowing growth, a high current account deficit and a persistent budget deficit. In this context, what can one expect from Finance Minister P. Chidambaram's budget? What should one expect?
Instead of traditional electionyear goodies, we have been told to expect that the deficit will stay at 5.3 per cent of the GDP this year and decline to 4.8 per cent of the GDP next year. While the goal of deficit reduction is unassailable, both the timing and the likely means to this end are worrisome. Short-term cuts to capital investment such as infrastructure undermine future growth prospects, and are likely to exacerbate economic inertia. Higher tax rates are a reward for free riders: they amount to doubling down on those who already pay tax, while giving another free pass to those who manage to avoid it.
One barometer of the government's appetite for cures over palliatives will be the introduction of the long-awaited goods and services tax (GST). The GST, favoured by economists as a means to rationalise the tax system, is the camel's nose for removing tax-barriers to domestic trade. But it will require compromise and political courage by both the Centre and the states, and could easily be undone by the complex array of exclusions that have already been bandied about. Even if the budget manages to hit a few short-term targets, it looks less likely to address deeper reforms, which are essential for sustained growth.