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Revenue may fall
Mid-year review calls for tax reforms
Tribune News Service

New Delhi, December 13
The Mid-Year Economic Review for the current financial year, placed in Parliament today, said the government will have to resort to appropriate corrective measures in the wake of the slow growth in the overall tax revenue collections.

The review also focussed on policy attention on issues of tax reforms, inadequate infrastructure and insufficient investment and a review of policies and procedures to attract larger doses of foreign investment, even as it dropped more than subtle hints that the government was not expecting the economy to grow beyond 6 per cent in the current fiscal year.

It notes that the RBI has projected the economy to grow at a rate between 6 and 6.5 per cent for the current year. “Even at a lower rate of 6 per cent plus growth for the current year, India will continue to be one of the fastest growing economies of the world.”

Finance Minister, P. Chidambaram, however, appeared bullish on the macro prospects of the economy, saying that he was “optimistic and positive”.

“I think if all players play their part, the year will end on a very substantial and positive note”, Mr Chidambaram told newspersons after tabling the review in Parliament.

The review said the main reason of slippage in achieving the Fiscal Responsibility and Budget Management (FRBM) target of revenue deficit is that the growth in overall tax revenue from April to September 2004 has been only 20 per cent against the 25 per cent assumed in the Budget.

“This in turn is largely attributable to normal lower collections in the first half of the financial year, delay in the passage of the Finance Act, and to some extent, to the post-Budget duty concessions”, it said.

From April to September 2004, the fiscal and revenue deficits were lower by Rs 27,779 crore and Rs 5,476 crore than the corresponding fiscal indicators in the same period of the previous year, mainly because of an appreciable increase under tax receipts (Rs 12,803 crore) and loan pre-payments by states (Rs 29,431 crore).

Yet, the improvements in these key parameters of fiscal performance fall short of the targets set by the FRBM Rules.

Under FRBM Rules, the government is required to take appropriate corrective measures in case the outcome of the mid-year review shows that the total non-debt receipts are less than 40 per cent of budget estimates, fiscal deficits is higher than 45 per cent of the Budget estimates or revenue deficit is higher than 45 per cent of the Budget estimates.

The fiscal performance in the first half of the current year does not fully measure up to the above benchmarks. “The revenue deficit during the first half at 78.7 per cent of Budget estimates is considerably in excess of the FRBM target of 45 per cent”, the review said.

One of the major concerns that needs to be addressed for carrying forward fiscal consolidation is reform of the present subsidy regime, the review says. The report on subsidies is in the process of finalisation, it says, adding that “untargeted subsidies violated the cannons of equity.”

On agriculture, the review said that the prospect of a good rabi crop is likely to offset the shortfall in kharif, and overall agricultural output can be expected to be “flat or marginally lower in the current year”.

“With industry and service sectors remaining buoyant, the overall outlook for the Indian economy — one of the fastest growing economies in the world — continues to be reasonably bright in 2004-05”, the review said.

Mr Chidambaram, however, asked farmers, industrialists and service providers not to be complacent and work hard to achieve results and move forward as the year 2005 was expected to be even more optimistic.

The review said that there is need for “moderation and stability in tax rates, providing the right kind of incentives for investment in particular, and more efficient market behaviour in general, and expanding the tax base through expansion of services and removal of unsustainable and discretionary exemptions”.

A comprehensive review needs to be undertaken of the policies and procedures that underpin tax policy to operationalise sound tax principles and practices.

“There is need for focussed attention on the twin issues of insufficient investment and inadequate infrastructure. Reinforcing the encouraging trends observed in the first half of the current year and minimising the downside risks from the high and volatile petroleum and metal prices calls for sustained efforts to further structural reforms and to continue with the already charted path of fiscal consolidation,’’ it said.

The review says there is need for stepping up foreign investment through a review of policies and procedures.

“A beginning has been made by enhancing the FDI ceiling in civil aviation. However, the task of achieving larger foreign investment in most sectors, particularly key sectors like telecommunications, insurance and pension, remain. Rapid development of insurance and pension funds will not only add directly to a system of privately-paid social security, but also create a market for long-term funds, an essential ingredient for financing infrastructure with long repayment periods,’’ it says.

On the politically contentious issue of allowing FDI in the retail sector, the review says that the role that could be played by organised retail chains, including international ones, merits a careful consideration.
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