Adding to Mukherjee’s current account deficit woes is the accumulation of arrears of some Rs. 5,00,000 crore in tax disputes or alleged non-payment of taxes and levies by corporate and individual assesses. This is outside the large undisclosed income by businesses and individuals, a substantial part of which gets swapped in foreign exchange and stashed abroad through illegal hawala route. There is no fast track remedy with the finance minister to this problem, a major hindrance to the government’s honest revenue collection effort.

Lower rates of taxes and levies have certainly improved tax compliance at middle-income levels and in smaller business transactions. But, they seem to have failed to bring the desired impact on high-income groups and business entities, who still indulge in large scale tax evasion, understatement of income, over invoicing and under invoicing, hawala transactions, project cost manipulation and large external commercial borrowings.

The result of the government’s gross negligence towards building a reliable tax collection apparatus is the creation of deficit dinosaur which now threatens to eat up the very vitals of the economy. The alarm button was said to have been already pushed by the Reserve Bank of India (RBI) Governor Duvvuri Subbarao in the recent pre-budget meeting of the Financial Stability and Development Council (FSDC) under the chairmanship of the finance minister himself. The newly created FSDC is billed a super-regulator or the ultimate oversight body of all financial regulators such as RBI, Securities & Exchange Board of India (SEBI) and others in the fields of insurance, telecommunications, etc. The current account deficit at the end of 2010-11 is projected to reach an alarmingly high level of three per cent of the country’s gross domestic product (GDP) as against the desirable level of around 1.5 per cent or below.

Logically, the key focus of Pranab Mukherjee’s 2011-12 budget is bound to be the deficit management. And, to this end, his options are limited mostly to non-tax measures calling for further economic and financial reform. The budget is likely to present a more liberalised road map for FDI. The government may relax the FDI cap in a host of critical areas such as insurance and defence production and open new areas such as retail trade. The government’s share disinvestment programme in public sector undertakings (PSUs) may gather further momentum with possible outright sale of its entire stake in some of the undertakings as it had done earlier in the cases of Indian Petrochemicals (IPCL) and Bharat Aluminium (Balco). The PSU disinvestment has a potential to mop up revenue up to Rs. 1,00,000 crore in 2011-12 although the government may initially target only at around Rs. 50,000 crore.

While there exists a distinct possibility of the government exercising a tighter expenditure control by cutting the existing financial booster to domestic industry, introduced to fight the impact of global recession in 2009 and 2010, the finance minister will certainly take measures to contain the exchequer’s exposure on subsidies. Government subsidies in petrol, diesel, cooking gas and fertilizer prices will be brought down further during next year though they may not be clearly mentioned in the budget proposals in view of pending state assembly elections. Their price hikes are almost certain to come before the end of the first quarter of the next fiscal.

The export sector, which has nearly reached the saturation level mainly because of the traditionally small size of the basket of products and services it handles, is likely to get some boost in the coming budget, essentially to control the fast widening trade gap. The budget may also introduce countervailing duties for items as an anti-dumping measure to protect domestic industry against aggressive and unethical exports to India by some export-led Asian economies. Export of agricultural products and processed foods is likely to go up by 15 to 20 per cent, this year, in terms of volume irrespective of their domestic demand. There may be some incentives for export of manufactured goods as well. Unfortunately, this is one area the government seems to have willfully neglected unlike other major Asian economies and European trade partners.

The inflation control may get only a lip service in the coming budget in keeping with the practice in the previous budgets, especially since 2007-08. The prices are likely to shoot up next June onwards. The current high interest rate regime will be reversed after March. Both lending and deposit rates of commercial banks will ease from April to bring cheers to industry and to ensure higher production, consumption and stable economic growth. The relaxation of monetary measure will, once again, contribute to inflation.

The 2011-12 budget may have nothing particular to cheer the stock market, which has been on its own sail going through ups and downs more because of international trends than domestic fundamentals. The budget is unlikely to be harsh on fund flow from tax heavens from countries such as Mauritius, British Virgin Islands, Isle of Man, St. Kitts, Liberia, etc., because such a measure will badly dampen the FII sentiment and investments in the secondary market. Without a bullish stock market, few will seek to invest in India. On the other hand, domestic IPOs and PSU stake sale will fail if the stock market continues to be depressed. Ironically, the liberal FII regime will foil the government’s bid to contain the black money movement in and out of the country.

Realistically speaking, the finance minister’s hands are tied. There is little scope for him to take some truly innovative and strong measures in the coming budget to tackle the malaise of the system, giving rise to increasing financial corruption, black money generation, concentration of wealth among a small section of the population, inflation and poor social infrastructure, built out of years of economic mismanagement and neglect. Little he can do to address the long existing ‘governance deficit’ or 'ethical deficit' under the existing situation and political compulsion.
(IPA Service)