The budget for 2012-13 estimates a steep increase in fiscal deficit at Rs.5,13,590 crore against the estimate of Rs.4,12,817 crore when the budget for 2011-12 was presented. The Economic Survey and the RBI Governor have stressed the need for fiscal consolidation. There are three issues — resource mobilisation, expenditure control and medium-term fiscal projections.

Mobilising resources without increasing taxes should be the preferred option. The two per cent hike in Central excise and service tax should be the last option. This will make it more difficult to get the States on board in passing the GST Act. One alternative is to plug the drain on revenue due to tax exemptions given every year. Revenue forgone is nothing but a form of expenditure. This should be considered an expenditure item under outcome budgeting and get Parliament approval. This will help monitor if these concessions are serving the desired objectives.

Another issue is collection of tax arrears. Improving the efficiency of collection merits time bound action. A short cut for increasing resources is disinvestment. This failed miserably. When ONGC shares were put on auction, there were no takers. Ultimately, LIC had to do the rescue act. The Budget for 2011-12 estimated disinvestment proceeds at Rs.40,000 crore which was not met. In spite of this, the target for 2012-13 is set at Rs.30,000 crore. It is essential to time the disinvestment correctly and not to depend on other PSUs to subscribe.

Eliminating non-priority and unproductive expenditure and focussing on priority expenditure to promote growth through asset creation and productive employment should be the focus.

One substantial item of expenditure is on subsidies for oil, fertilizer and food — Rs.1,34,210 crore in BE 2011-12, Rs.2,08,502 crore RE 2011-12 and Rs.1,79,554 crore BE 2012-13. The only clue from the budget is an ad hoc cap in the mid-term projections without specific measures or actions to achieve any meaningful reduction. Targeting of beneficiaries can improve with proper identification. The national rural employment guarantee scheme needs drastic review to improve local productive asset creation.

Elimination of unnecessary expenditure requires strict enforcement of zero-based budgeting, which prescribes a fresh examination of all current expenditure at the time of annual budget formulation to check its continuing relevance and productivity.

The government should give up non-Plan and Plan division and adopt developmental and non-developmental division as a better guide for fiscal consolidation. Steps should be taken to reduce dependence of PSUs . Closure of sick units should be expedited.Substantial funds are given to statutory funds, autonomous bodies and state governments for various projects. The effectiveness and outcome of this transfer have to be monitored.

The implementation of the FRBM Act, 2003, has been more in letter than in spirit. Focus on basic reforms in revenue and expenditure is sidetracked by the sole object of reaching the deficit targets as a percentage of GDP. Instead of focusing on how the deficit is reduced, attention is given to the quantum of reduction. The fiscal medium-term plan does not reflect any results anticipated from specific reforms. There is scope also for spelling out the key assumptions. Only then, the medium-term plan will help fiscal consolidation and generate investor and consumer confidence. This will also help RBI in planning further its monetary steps. The Central Government could set an example to the State governments in the formulation of a credible and realistic medium-term fiscal plan.

The author is former IMF Budget Advisor

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