Under the chairmanship of Dr Vijay Kelkar in august 2012, finance minister constituted a committee to outline a roadmap for fiscal consolidation. The objective of committee was to give recommendations on midterm corrections for the current fiscal year(2012-13) and reforms for medium term fiscal consolidation.
Need for fiscal consolidation
Fiscal consolidation is very important because India’s fiscal deficit, the excess of government expenditure over receipts, is forecasted to expand to 6.1% of GDP, higher than the budget estimate of 5.1%. High fiscal deficit can be problematic for many reasons
- investment, growth and employment could all weaken
- inflation could increase
- monetary policy expansion may be constrained
- external sector imbalances could widen
- high fiscal deficits might reduce investor confidence in India.
Key Points in report
The study by committee indicates that inflation and investment are hampered positively by fiscal discipline.
Report also talks about the low performance of oil companies and suggests that under recoveries could lead to a financial crisis for OMCs and a possible oil supply breakdown.
Report talks about relation between growth rate and employment according to the committee’s calculations, growth at around 7% would provide adequate employment opportunities.
According to report as a result of reduced corporate profits, weaker industrial output and decreasing imports , the committee predicts a shortfall in tax revenues of around Rs 60,000 crore.
Report also highlights subsidies as the greatest fiscal risk for year 2012-13. In 2012-13, the food subsidy is expected to exceed budget estimates by Rs 10,000 crore.
Committee’s Important Recommendations:
- The committee proposes tax reforms to bring the tax to GDP ratio to the high levels of 11.9%. It also suggests amend tax laws to charge a market based interest rate on defaulted tax payments.
- The committee suggests implementing the nationwide Goods and Services Tax (GST) recommended by the 13th Finance Commission. This should increase output, exports and tax revenues.
- The committee recommends reforming union excise duties and service tax to allow for integration into the GST regime. The standard tax rate of 12% should be gradually phased down to the 8% proposed for the central GST.
- The committee is urged to sell its minority holdings in largely private entities like BALCO and Hindustan zinc.
- A national portal should be created to enable tax payers to file application seeking rectification and appeal effect. A Data-warehousing and data-mining infrastructure should be setup.
- Amendment of relevant laws to ensure the mandatory quoting of UID and PAN number in all economic transactions including bank accounts, fixed deposits, all financial transactions, all salary payments and immoveable property transaction.
- The committee views the subsidy on diesel as a major contributor to India’s fiscal deterioration. It recommends an immediate increase of Rs 4/ litre of diesel, Rs 2/litre in kerosene and Rs 50 per LPG cylinder. This would decrease the under –recovery burden by Rs 20,000 within 6 months according to the report. In the longer term, the committee wants to gradually phase out the per unit subsidy on diesel in two years and LPG subsidy by 2014-15.Also implement the method of direct cash transfer for subsidies for needy household.
- The MGNREGA scheme should not be fiscally constrained; diesel subsidies in rainfall deficient districts should be provided; and access to seeds, fertilizer and credit should be increased.