02-25-2005, 11:35 PM
<b>India Needs to Raise Revenue to Cut Deficit, Government Says</b><!--QuoteBegin-->QUOTE<!--QuoteEBegin-->Feb. 25 (Bloomberg) -- India must boost revenue by taxing more services, improving compliance and reducing exemptions to cut borrowing and spur growth in Asia's fourth-largest economy, the government said in a report three days before the budget.
Cutting the budget deficit ``critically hinges upon the success in raising the tax-gross domestic product ratio,'' the Economic Survey, prepared by officials advising Finance Minister P. Chidambaram, said. Chidambaram presents his budget for the fiscal year starting April 1 on Feb. 28.
India needs to increase revenue to pare the country's $31 billion fiscal deficit and fulfill a pledge to spend $150 billion in the next decade to upgrade roads, power lines and other infrastructure. The projects are designed to develop an economy where 800 million people live on less than $2 a day and help India vie with neighboring China for overseas investment.
<b>``Higher tax revenues have to be realized not through increasing tax rates, but through innovative changes in policies, procedures, laws and dispute settlement mechanisms,''</b> the report said.
Increasing revenue from India's 10 percent service tax may help Chidambaram reduce the fiscal deficit to 4.1 percent of gross domestic product in the year starting April 1, a nine-year low, from 4.4 percent this fiscal year, according to the median forecast of seven economists surveyed by Bloomberg.
India has scope to raise taxes. Total tax revenue, including levies on income, imports and sales, amounts to less than 10 percent of GDP. In China, the figure is 20 percent, and among the members of the Organization for Economic Cooperation and Development it averaged 37 percent in 2001. Only 33 million of India's 400 million workers pay tax.
Service Tax
Chidambaram is targeting service companies because the tax they pay is low.
Tax revenue from services, which account for more than half of the $580 bilion economy, will come to 141.5 billion rupees ($3.2 billion) in the year ending March 31, the Indian government forecast in July. By contrast, the excise tax on manufacturers, which account for less than a quarter of GDP, will total 1.09 trillion rupees.
``<b>The tax base needs to be widened through increase in the share of services in tax revenues</b>, removal of exemptions that don't conform to the established principles of tax policy and an enforcement mechanism that is non-discretionary, transparent and effective,'' the survey said.
By law, India has to erase its $17 billion revenue deficit by March 2009, meaning it can only borrow for investment purposes thereafter. The government must cut its fiscal deficit, a measure of total borrowing, by 0.3 percentage points a year.
Debt
A lower deficit may help India win a higher debt rating, paring borrowing costs and spurring foreign investment. <b>The central government uses a quarter of its $109 billion budget to pay interest on its debt, estimated at 20 trillion rupees as of March 31, or almost two thirds of GDP.</b>
Standard and Poor's in 2002 reduced its rating on <b>India's local currency debt to BB+, the highest non-investment grade</b>, citing concerns about the deficit, which reached 6.2 percent of GDP by March that year. Moody's Investors Service has maintained its Ba2 rating, two levels below investment grade, since 1998.
``Further efforts are needed to tackle the problem of downward rigidity of lending rates,'' the report said. India's benchmark 10-year bond yields 6.5 percent, Asia' second-highest after the Philippines. U.S. government debt of similar maturity pays 4.3 percent.
Acknowledging there is limited scope to cut spending, the report said there is a need to contain ``unproductive'' spending and ``transform the outlays into better outcomes.''
Subsidies
Subsidies, which account for almost a tenth of India's budget, need to be targeted ``sharply at the poor, it said.
India also needs to continue with pension reforms and maintain a ``benign interest regime'' by cutting borrowing, the report said.
Inflation has slowed to a nine-month low of 5 percent as energy costs subsided and food prices fell. The average inflation rate in the 52-week period as of Jan. 22 was 6.5 percent compared with 5.5 percent as of Jan. 24, 2004, the report said.
<b>``There is a downward trend of prices particularly for the agro-based products during January-March every year due to seasonality of prices,</b>'' the document said. ``The current year is no exception to this general trend.''
India needs to continue its policy of not fixing a rate target for the rupee against the U.S. dollar and allowing market forces to determine the exchange rate, the document said.
<b>The rupee has gained 3.5 percent against the U.S. dollar in the past 12 months.</b>
India should ease international trade and investment curbs to contain the strengthening of the rupee, the document said.
``Further liberalization of the external sector is also likely to counter some of the upward pressure on the exchange rate of the rupee,'' the report said
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Cutting the budget deficit ``critically hinges upon the success in raising the tax-gross domestic product ratio,'' the Economic Survey, prepared by officials advising Finance Minister P. Chidambaram, said. Chidambaram presents his budget for the fiscal year starting April 1 on Feb. 28.
India needs to increase revenue to pare the country's $31 billion fiscal deficit and fulfill a pledge to spend $150 billion in the next decade to upgrade roads, power lines and other infrastructure. The projects are designed to develop an economy where 800 million people live on less than $2 a day and help India vie with neighboring China for overseas investment.
<b>``Higher tax revenues have to be realized not through increasing tax rates, but through innovative changes in policies, procedures, laws and dispute settlement mechanisms,''</b> the report said.
Increasing revenue from India's 10 percent service tax may help Chidambaram reduce the fiscal deficit to 4.1 percent of gross domestic product in the year starting April 1, a nine-year low, from 4.4 percent this fiscal year, according to the median forecast of seven economists surveyed by Bloomberg.
India has scope to raise taxes. Total tax revenue, including levies on income, imports and sales, amounts to less than 10 percent of GDP. In China, the figure is 20 percent, and among the members of the Organization for Economic Cooperation and Development it averaged 37 percent in 2001. Only 33 million of India's 400 million workers pay tax.
Service Tax
Chidambaram is targeting service companies because the tax they pay is low.
Tax revenue from services, which account for more than half of the $580 bilion economy, will come to 141.5 billion rupees ($3.2 billion) in the year ending March 31, the Indian government forecast in July. By contrast, the excise tax on manufacturers, which account for less than a quarter of GDP, will total 1.09 trillion rupees.
``<b>The tax base needs to be widened through increase in the share of services in tax revenues</b>, removal of exemptions that don't conform to the established principles of tax policy and an enforcement mechanism that is non-discretionary, transparent and effective,'' the survey said.
By law, India has to erase its $17 billion revenue deficit by March 2009, meaning it can only borrow for investment purposes thereafter. The government must cut its fiscal deficit, a measure of total borrowing, by 0.3 percentage points a year.
Debt
A lower deficit may help India win a higher debt rating, paring borrowing costs and spurring foreign investment. <b>The central government uses a quarter of its $109 billion budget to pay interest on its debt, estimated at 20 trillion rupees as of March 31, or almost two thirds of GDP.</b>
Standard and Poor's in 2002 reduced its rating on <b>India's local currency debt to BB+, the highest non-investment grade</b>, citing concerns about the deficit, which reached 6.2 percent of GDP by March that year. Moody's Investors Service has maintained its Ba2 rating, two levels below investment grade, since 1998.
``Further efforts are needed to tackle the problem of downward rigidity of lending rates,'' the report said. India's benchmark 10-year bond yields 6.5 percent, Asia' second-highest after the Philippines. U.S. government debt of similar maturity pays 4.3 percent.
Acknowledging there is limited scope to cut spending, the report said there is a need to contain ``unproductive'' spending and ``transform the outlays into better outcomes.''
Subsidies
Subsidies, which account for almost a tenth of India's budget, need to be targeted ``sharply at the poor, it said.
India also needs to continue with pension reforms and maintain a ``benign interest regime'' by cutting borrowing, the report said.
Inflation has slowed to a nine-month low of 5 percent as energy costs subsided and food prices fell. The average inflation rate in the 52-week period as of Jan. 22 was 6.5 percent compared with 5.5 percent as of Jan. 24, 2004, the report said.
<b>``There is a downward trend of prices particularly for the agro-based products during January-March every year due to seasonality of prices,</b>'' the document said. ``The current year is no exception to this general trend.''
India needs to continue its policy of not fixing a rate target for the rupee against the U.S. dollar and allowing market forces to determine the exchange rate, the document said.
<b>The rupee has gained 3.5 percent against the U.S. dollar in the past 12 months.</b>
India should ease international trade and investment curbs to contain the strengthening of the rupee, the document said.
``Further liberalization of the external sector is also likely to counter some of the upward pressure on the exchange rate of the rupee,'' the report said
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