In fact, the fiscal deficit is ominously inching forward beyond the projected level of 5.1 per cent of GDP in the 2012-13 budget, which Chidambaram has inherited from Pranab Mukherjee, now the President of India, as the government is far behind the revenue targets. If the trend continues, the deficit may top the six per cent mark. Lower economic growth is primarily responsible for slower revenue growth from direct and indirect tax collections.

For instance, indirect tax collections during the first half (April-September) of the current fiscal year rose at a low rate of 15.6 per cent – around Rs.2.17 lakh crore – against the annual target of 27 per cent. This is mainly because of the slow rate of industrial output growth during April-August 2012-13 at 0.4 per cent, down from 5.6 per cent in the same period, last fiscal. The target for indirect tax collection, comprising customs, excise and service tax, for the whole year is Rs 5.05 lakh crore. It means the collection in the second half must improve by an overall 39 per cent. A daunting target, indeed!

On the other hand, the gross direct tax collection increased only 5.87 per cent at Rs. 2.72 lakh crore. The total corporate tax collection rose merely by 1.6 per cent. Collections from securities transaction tax slipped by 17 per cent. The direct tax collection should increase by 15 per cent to meet the target of Rs 5.7 lakh crore for the fiscal. This too looks like a tall order under the present circumstances. The poor growth rate of corporate tax collection is indicative of depressive sales growth leading to companies offering discounts on demand-elastic products and services – from real estate to automobiles, luxury goods, home décor, branded garments and shoes, computers, laptops and mobile phones, white and brown goods, etc. The depressed stock market was responsible for the fall in the revenue from securities transaction tax.

Ironically, Reserve Bank Governor D Subbarao, too, expressed a similar concern just two days before the finance minister made his characteristic straightforward ‘act-now’ appeal to his colleagues at a meeting of Prime Minister Manmohan Singh’s newly expanded council of ministers. The contexts and concerns were somewhat different, though. The RBI governor, more worried about controlling the prolonged inflation, disagreed with the finance minister on the interest rate cut to pep up the industry and economy. Instead, he advised the government to cut expenditure and overall deficit to control prices. Subbarao attached more importance to fiscal discipline than to rate cut and foreign fund flow into economy. In some ways, he, too, is right.

The growing fiscal and current account deficits pose more danger to the economy than FDI and FII inflows into the economy. The rising fiscal deficit is the root cause of inflation, which is still prevailing at uncomfortable levels of close to nine per cent, and loss of the common man’s buying power. The latter is affecting demand, in general, and contracting production and supply. The rising current account deficit is forcing higher external debt, leading to higher debt service cost and adding to the country’s public debt and pressure on fiscal management. The current account deficit can be largely controlled through policy measures, compressing imports and pushing up exports although the latter can’t be achieved overnight. The country’s inefficient manufacturing sector is the weakest link to its becoming export savvy.

Higher FDI can stabilize Rupee in the short term, but its positive impact on economy and government revenue will depend on how quickly it is used on ground to create the desired multiplier effect. Slow-down in large FDI-funded projects due to land acquisition hurdles, material supply problem, logistics and unhealthy labour situation could in fact push up inflation because of higher idle money (local currency) supply in the system. When the finance minister says that “foreign investment (is) not an option, but an absolute necessity,” he is fully aware that for foreign investors India will always remain an option, not because of the extent of its investment policy friendliness, but also on ground realities. The availability of land is the biggest hurdle to new projects, local or FDI funded. Even electricity transmission projects are held up for non-availability of a few square yards of land for erecting towers along the route.

Unfortunately, the UPA government’s constant fire-fighting exercise to deal with never-ending corruption charges seems to have considerably sapped its energy and enthusiasm to fight the economic ills with strong administrative and policy measures. The entire government and the Congress party are forced to get bogged down in crisis communication as one after sensational corruption cases involving ministers, departments and top party leaders and their kin unfold in quick intervals. The government is, as though, under siege. And, political common sense is becoming quite uncommon.

For instance, the quick withdrawal of the union cabinet’s decision to put restrictions on the use of the RTI Act at the behest of the UPA chairperson had, instead of improving the image of Mrs Sonia Gandhi, projected the prime minister and his cabinet colleagues in a very poor light as suppressors of information concerning public life of politicians and civil servants. Similarly, the quick cabinet rejection of the new petroleum minister’s mindless decision making a fresh increase in the price of unsubsidized portion of domestic cooking gas cylinders, under sharp criticism from opposition parties, shows not only the government’s total lack of timing sense, but its inability to stick to a decision at expectedly adverse situations.

Under the circumstance, Chidambaram’s strong straightforward message – act now, or face ‘junk’ international rating — to his ministerial colleagues is unlikely to have much impact on the government’s and its individual minister’s thought process and functioning style. Yet, the economy needs to be saved from the current policy paralysis and quickly put back to the top gear. The country must work together to restore the confidence of investors, local or foreign, in its administration and its ability to deliver what it promises. Chidambaram has the capability and grit to show the way. Maybe, India should follow the Japanese model of governance which never allowed its economy to fall victim of political and financial scams involving ministers, bureaucrats and ruling party top brass, all dispensable for the health and progress of its economy without affecting the continuity of the elected government. (IPA Service)