The finance minister will do well to start his budget speech with a medium-term outlook for the economy and the fiscal situation over that period. He would then be able to place the present budget in a medium-term context, and as suggested by one of the most seasoned and experienced economists, he should give an assurance that the basic features of his fiscal policy or approach, such as the direct and indirect tax rates, expenditure allocations and trends, will remain unchanged except in an emergency. This will resurrect the medium-term fiscal strategy which has until now been relegated to the appendix.

It will also be important for the finance minister to reiterate his commitment to fiscal discipline and lay down the path for meeting Fiscal Responsibility and Budget Management targets in the medium term. In doing so, he will have to redefine ‘revenue expenditure’ to make it net of outlays on education and health. These outlays are now almost universally recognized as essential components of overall capital formation as they contribute to the building of human capital which is equally if not more important than physical capital for achieving rapid and equitable growth. It is prudent to insist on bringing this ‘pure revenue deficit’ down to zero as quickly as possible. Borrowing to spend on salary and consumption is simply bad policy.

To regain fiscal balance, some effort will have to be spent on additional resource mobilization and in this context ‘tax pessimism’ is not warranted. In fact the tax to GDP ratio can be raised further because if we compare our tax to GDP ratio with other emerging Asian economies where the State has played a more active developmental role, then India does not appear to be an outlier. Our current tax to GDP ratio (combined Federal and States) is 16-17 per cent. Malaysia, China, Taiwan and Korea all had similar ratios at per capita income levels that we have today. And we can safely assume that India’s GDP has been substantially understated and so the real tax to GDP ratio is in fact much smaller. To raise the tax-GDP ratio, the finance minister will have to substantially simplify both direct and indirect tax structures. In the case of direct taxes, there is little if any justification for keeping all the exemptions, cesses and special charges in place. These can all be quantified and merged with a single tax rate for both personal income and corporate taxes. At the same time he should extend the direct tax net to cover all the services including legal services which his predecessor thought should not be covered because lawyers, according to him, did not add value in rendering their services!

I have always wondered about the actual reasons behind the non-existence of estate duty in India. This is a very progressive tax as it significantly weakens the incentive for accumulating wealth, discourages rentier incomes and encourages people to earn a living. The foreign minister should leave the present indirect tax structure, with its rates lowered in response to the global economic downturn, largely untouched. High indirect taxes make our industries uncompetitive and also prevent domestic demand from becoming large enough for the industry to benefit from economies of scale that would translate into comparative advantage on the international export market.

The proposal for Smart Cards for Public Distribution System beneficiaries was submitted to the Ministry of Finance three years ago. While there has been some initial work, the proposal, which has the potential to empower the actual beneficiaries and minimize corruption in related departments, has not been implemented. This Smart Card should not be linked to the issuance of a National Identity Card because its objectives are completely different. It will put real purchasing power in the hands of the beneficiaries, save costs and prevent large scale leakages.

Finally, the finance minister should resist granting any more fiscal breaks for exporters until the entire existing system of export promotion is thoroughly reviewed and revamped. Export promotion councils, federation of exporters, and duty draw back schemes have failed to exert any demonstrable impact on building real competitive strength as can be seen by India’s relatively minuscule share in world exports of goods and services, which remain at 1 and 2.5 per cent respectively. It will be more effective to simplify the export clearance procedures in order to lower transactions costs than to continue with the current regime. The finance minister should only thereafter announce a scheme under which export councils will receive payouts, which they could share with their members, once their sector exports achieve a certain minimum share of world markets.