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G. Srinivasan

The survey highlights the paradox that though considerable progress has been made over the past 10 years in the reform of the Indian tax system in all its aspects, tax revenue receipts have remained below 10 per cent of GDP throughout this period.

NEW DELHI, Feb. 26

WITH barely a day to go before the Union Budget 2002-03 is presented, the Economic Survey has thrown up enough hints as to how the fiscal proposals and policy announcements to pep up the economic growth to a desirable level should be formulated.

For once, unlike surveys of the past, the get-up this time round makes for absorbing reading as there is not much of sanctimonious sermons with the core area of concerns spelt out in concrete terms to make a graphic effect without appearing to be stringent in content.

The survey highlighted the paradox that though considerable progress has been made over the past 10 years in the reform of the Indian tax system in all its aspects, tax revenue receipts have remained below 10 per cent of GDP throughout this period.

Direct taxes have increased over the decade from about 1.9 per cent of GDP in 1990-91 to about 3.3 per cent in 2000-01, with their share in gross tax revenue galloping from 19 per cent to 36 per cent over the same period.

But as indirect taxes in the country are excessively dependent on the industrial sector, the dismal industrial performance in general and the fall in growth in industrial value-added in particular (this fell from an average of 8.5 per cent per year from 1993-94 to 1996-97 to 4.8 per cent per year in the last four years 1997-98 to 2000-01) have had a dreadful effect on the collection of indirect taxes.

As the survey concedes, a scrutiny of the available data on income distribution suggests that despite the substantial reduction in income-tax rates that has supervened, compliance among non-salaried income-tax payers remains low.

Hence, what is required as diagnosed by the survey is "wholesale modernisation" of the tax administration which depend more on improved systems to enforce compliance rather than the "traditional police methods of search, seizure and the like". The survey itself provides the answer - greater stress is to be laid on extensive use of information technology, data warehousing, data mining and analysis and advent of unique tax identification numbers. The Budget to be unveiled on February 28 might hint at some fresh moves in this regard.

In tune with the trends of reduced marginal tax rates, the myriad tax concessions which manifest in the form of full or partial exemptions, deductions and tax holidays need to be done away with as they represent "a revenue cost for the Government".

Whether Mr Sinha will oblige the authors of the survey by moving even modestly in this direction is to be seen.

The survey makes bold to pinpoint that the doggedness of fiscal deficit is due to the "indirect effect on the exchequer of the levy of inadequate user charges" for most public utilities.

Uneconomic and low user charges in sectors such as power, road transport, irrigation and the like at the State level impair State Budgets. They impact on the Central Budget too through non-payment or inadequate payment to Central Government utilities. In like fashion, unbalanced tariffs in Central services such as the railways lead to financial losses which then have to be recouped for by the Central Budget. It is this diagnosis that has of late made the Centre to evolve milestones in the transfer of loans, assistance or grants to the States even in infrastructure areas, which would augur well for maintaining fiscal rectitude if both the parties privy to it follow the norms scrupulously.

The survey also indicted the Centre and the States for piling up huge revenue deficits. As long as the non-revenue fiscal deficit, triggered off by massive borrowing binge of the Centre as well as the States, would engender investment, which provides adequate returns com- mensurate with the cost of borrowing, it is permissible.

But, as the survey admits, this has so far not been the case; as a result, "today's fiscal deficit results in tomorrow's revenue deficit."

The survey, however, says this is feasible provided "appropriate user charges are levied on public services" so that borrowings do not up end in consumption without leading to wealth creation and employment generation.

The survey has zeroed in on crucial areas such as agriculture, industry, infrastructure and fiscal deficit consolidation for corrective action and reforms.

How far the Finance Minister would bring about policy changes through fiscal tools would only determine whether the Tenth Plan indicative target of 8 per cent per annum is anywhere near achievement from the low level of 5.4 per cent set for the current fiscal.

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