Finance ministers facing stressful fiscal situations have been known to try a trick or two to regain control. A fringe benefits tax here, a cess or surcharge there; retrospective taxes and generous subsidies - there are several examples of measures being implemented that turn out to do more harm than good. A Douglas Marillier scoop shot or a Mahendra Singh Dhoni helicopter shot may look very good when they come off, but that happens rarely. Likewise with Budget tricks; tempting as it may be to pull off what may come to be known as a stroke of genius, it is much more likely to be panned, diverting attention from the good things that are in the Budget.
Finance Minister Arun Jaitley faces such a situation as he prepares for his first Budget. The fiscal situation is in a mess, with widespread suspicion that the deficit is much larger than it was claimed to be. Subsidies, while certainly not running amok, are far higher than they should be. Public investment is stagnant at a time when the economy's infrastructure needs are mounting and private capital is not rising to the occasion. There is persistent uncertainty about tax treatment of major transactions, which may well become a deterrent to foreign direct investment. All these things need fixing, and quickly. But solutions to each one may go against solutions to others. In order to plug a large deficit, Mr Jaitley may be tempted to levy a new tax rather than curb politically sensitive subsidies. Or he may forego significant realisations from divestment because the government believes that public enterprises should be nurtured rather than sold off. There are many goals and many potential conflicts. How can he find the best balance?
The answer: by sticking to the basics. If he has to raise taxes, his best approach would be to levy a small surcharge on the highest income levels, or even create a new slab for incomes above, say, Rs 50 lakh. Taxing capital gains has been a contentious issue in this country, but given the state of the government's finances, it may be time to impose a moderate tax on a source of income that is effectively determined by factors external to the individual. A broad-based investment tax credit, or, even better, an employment tax credit, while lowering revenues in the short term, may help boost them later - while helping investment and growth along. Most importantly, Mr Jaitley needs to accelerate the movement towards the goods and services tax, or GST, which is the best way to significantly increase revenues without disrupting economic activity. On the expenditure side, he has no choice but to cap subsidies, perhaps in the aggregate, while retaining the flexibility to distribute them across items. He must also quickly find massive new resources for investment in infrastructure, for which his best bet would be massive divestment, unpalatable as this might be. Mr Jaitley must also assuage the uneasiness that the retrospective tax assessments and large disputes have induced. Transparency and predictability are hallmarks of a good tax system, and India's must rapidly move up those ladders. In sum, the allure of playing to the gallery must be resisted, and a straight bat shown.
