Raise tax-GDP ratio to 15%: Assocham

In the run-up to the Budget, industry chamber Assocham today asked government to raise tax-GDP ratio to over 15 per cent and trim wasteful spendings in subsidies to improve the financial situation.

"A higher GDP ratio of 15 per cent is necessary given India's current public finance crisis as the combined fiscal deficit of the central and state governments adds up to 9.4 per cent of GDP," Assocham President Anil K Agarwal said releasing a study 'Reforming Management of India's Expenditure'.

The study, jointly brought out by Economic Management Institute, also urged the government to plug distortions and leakages in expenditures.

Out of the total budgeted expenditure of Rs 5,14,344 crore for 2005-06, the chamber said about 12 per cent goes waste in terms of subsidies for food, fertiliser and petroleum products.

Stressing on a higher tax-GDP ratio, the chamber said India's public sector deficit was much higher if the central and state deficits were added with the local government and public enterprises. As a result, the combined outstanding liability of both the central and state rose to 87.1 per cent of the GDP at the end of 2003-04 from 67.8 per cent in 1990-91, it said.

The total public debt is now 107 per cent of the GDP with contingent liability from loss making public enterprises alone adding up to 12 per cent of the GDP. The chamber, therefore, suggested that the ministry save through elimination of distortions and leakages in its expenditures and raise additional revenue through taxation.

The budgeted expenditure for the current fiscal was Rs 5,14,344 crore out of which fertiliser subsidy was Rs 26,200 crore and petroleum subsidy would be Rs 3,644 crore. Though a majority of these subsidies does not reach the intended consumers and satisfies the higher expenditure groups in the urban areas and was thus regressive, the chamber said.

It further pointed out that the budgeted allocation of Rs 18,854 crore for public enterprises, of which equity investment was Rs 14,040 crore, loans Rs 4,812 crore and grants for Rs 2 crore.

Assocham questioned the rationale for helping public enterprise in financing and investments, and suggested that their financing be met through open market offers or commercial borrowings.

The paper also suggested a multi-step strategy to help government come out of its public finance crisis by putting up a mechanism to measure the development outcomes of all major programmes, carry out a review of the investment quality and of outcomes.

It also suggested encouragement of public enterprises to borrow directly from the market on commercial terms and revise and updated "general finance rules" with emphasis on greater delegation of authority to ministers in managing financial affairs.