Heed the Kelkar report

Last Updated: Sun, Sep 30, 2012 20:11 hrs

The report of the Vijay Kelkar Committee on fiscal consolidation argues that the Indian economy is “poised on the edge of a fiscal precipice”. The fiscal deficit is poised to miss its budgeted target by a large margin for the second year in a row — it could be 6.1 per cent of gross domestic product, a full percentage point higher than the Budget estimate. India is going through a demographic bulge, with millions entering the workforce yearly; fiscal space is needed to stimulate growth, or India’s demographic dividend will become a curse. The cost of doing nothing, the report argues, would approximate the crisis of 1991. The panel makes suggestions to take the fiscal deficit down to 5.2 per cent of GDP in 2012-13. However, some of these suggestions, including on tax policy, will require legislative action — difficult for the United Progressive Alliance (UPA) to pull off currently. The emphasis should, therefore, be on speedily implementing administrative reforms, instead of merely focusing on legislative changes such as the constitutional amendment for the goods and services tax. As the chairman of the committee told this newspaper, credible action, not a big-bang step, is needed to achieve fiscal consolidation.

The report is pessimistic about disinvestment receipts. But through efficient management – perhaps through an exchange-traded fund that allows retail investors to compete, as is already being contemplated – major steps towards consolidation can take place. The winding up of the Specified Undertaking of the Unit Trust of India, or SUUTI, was cleared by the Cabinet in March this year. The report says there is no economic rationale for holding on to SUUTI, or to the government’s residual stake in Hindustan Zinc and Bharat Aluminium. Tax administration can also be streamlined short of amendment in several ways. Prioritisation of Plan expenditure, too, the report points out, would require shifting some expenditure to late in the ongoing five-year period. Finally, the recommendation that the UPA go slow on the direct taxes Bill makes sense. It is necessary to raise the tax-to-GDP ratio, not lower it in the short run. It makes long-run sense, too — India should not introduce a “rational” code that is actually riddled with exemptions. Loopholes should be closed off before the tax rates are lowered.

The government’s initial reaction to the report has been disappointing. Its most crucial part is the reminder that fuel and fertiliser subsidies are unsustainable (and that food subsidies should not be increased immediately). There can be no further delay in introducing a time-bound road map to freed-up petroleum prices, as well as in increasing the price of ration-shop foodstuffs in response to higher procurement prices. The government deserves credit for setting up, on Friday, committees to move towards an “architecture for cash transfers”. Yet neither food nor fuel was among those specifically mentioned as immediate clients of that architecture. India clearly cannot wait for Aadhaar’s full roll-out. Continuing poorly targeted subsidies even for a year will do untold long-term damage to India’s young people.

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