Budget is an Opportunity to See How Far India's New Honesty Extends: Scissors

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February 28, 2013 4:29 PM EST

Derek Scissors, a senior research fellow at The Heritage Foundation, is one of the most astute observers of the Indian economy. In recent years, he has been highly critical of lack of reforms and fiscal responsibility in India. Apart from India, Scissors focuses on economies of China and Japan. In an email interview, he talks about Thursday's budget.

Deficit is a big issue. Each year, the government is projecting one figure and the actual is growing more than predicted. How can this be controlled?

The government should adopt conservative, instead of self-serving, views of anticipated revenue gains. This will enhance the credibility of the budget.

Fiscal deficit in comparison with GDP is also growing. Will the budget throw some lights on this issue?

The government has become more realistic in its discussion than it was in 2011. The budget is an opportunity to see how far this new honesty extends.

The government seems to be continuously shying away from the disinvestment target resulting in ballooning of fiscal deficit. Why is the government dithering? Is it to wean away laborers' votes?

The government treats divestment as a fiscal issue, which is why there is suddenly a rush to divest as the budget looms. But divestment is not an important fiscal issue - the amounts are too small. It is important as a sign of reform, but the government is not yet interested in broad reform.

The RBI and the government do not seem to be on the same page on reducing the interest rates. Though the RBI accepts that the government is a stakeholder in the central bank, the differences between them is still open. If this continues, how can the monetary policy be helpful to lift the growth rate?

The RBI is right and the government is wrong. Relying on monetary policy to support growth in an environment of considerable inflation is a mistake. It appears to be a politically easy path but it ultimately leads nowhere.

The GDP growth for the current fiscal year ending March 2013 seems to be heading towards one of the slowest at least in a decade. Is this because of the policy paralysis? Or is it because of the general weakness witnessed globally in the wake of European crisis, slowdown in the US and China's slower growth rate?

India is a large economy; its problems are more local than global. The government rode previous reforms to a strong performance last decade. The absence of reform for many years will take a good deal of time to overcome. The government cannot simply recognize its mistake and immediately have good results. And it's not even clear that the government has genuinely recognized its mistake.

The slower economic growth will allow a big call for initiatives to boost investment sentiment and revive growth to 8-9 percent from the projected 5+ percent level. What are the areas to be expected for boosting investment?

Boosting sentiment will only work for a few months. Only structural reform will revive growth on a sustained basis.

To move to accelerated growth rate, will the borrowing cost be reduced in the budget? Will the RBI follow the budget path or still be defiant?

In Japan, the US and elsewhere, borrowing costs have been reduced to accommodate irresponsible governments. This does not boost growth.

National Association of Software Service Companies (NASSCOM) calls for rationalization of taxes. Is this justified as the sector is one of the biggest paymasters?

Certainly a rationalization of taxes is called for - India is not even a unified market. The GST would have been a powerful force for growth all these years, if it had been implemented.

Insurance sector is clamoring for additional relaxation to encourage buying of long-term insurance policies. As the buyers are getting tax rebates, why should the government give in to this demand?

A good trade would be to eliminate insurance tax rebates while permitting a more open and competitive market.

Housing and real estate is vital for economic growth. But is this getting the right kind of attention from the government? The industry is clamoring for infrastructure status. Will the budget throw some light on this?

It would be better to eliminate the notion of "infrastructure" status entirely.

It is reported that contracts for only less than 20 percent of the original infrastructure project, for example, roads, have been awarded. If this is going to be the scenario, how will the infrastructure improve to spur economic growth?

The government cannot successfully force infrastructure expansion - this is a dream. It needs to create the financial and, most important, the legal conditions for commercial infrastructure development to occur. Property rights to land must be clear.

Infrastructure needs further push. Will the government provide some hints about it in the ensuing budget?

Government initiatives on infrastructure will continue to fail unless the private sector is given much more of a role. This, in turn, requires property rights to land to be clear.

The cost of living has gone up, with essential prices shooting up in the wake of rising oil prices and curbing gas supply to households. In this circumstance, what can the common man or middle income group expect from the government on controlling, especially, food prices? There is high expectations that the budget should offer some concrete steps to reduce price rice.

The government should not try to control prices. It doesn't work - black markets form and finally the official price is forced higher.

Food production is more than adequate. The problem is transportation across states. Regulatory and tax barriers between states must be eliminated.

There is a loud call for an upward revision of income tax slab due to rise in essential commodities price. The government may announce a slight increase in the existing ceiling limit. But will it satisfy the middle income group as the prices have shot up exorbitantly reducing any house hold savings? In short, the percentage of increase in tax ceiling limit will likely to be lower than the percentage of hike in food inflation.

Tax adjustments typically lag economic events. Even so, they should occur - tax brackets should be shifted in response to high inflation.

There is also a big cry to tax super rich. Will the government be ready to slap higher tax for super rich?

There is a huge income gap. Taxes on the rich should be higher but, in return, capital markets should be made more flexible. The rich will pay their fair share and still stimulate domestic economic activity.

Will the budget provide any hints of recovering unaccounted monies, whether it is stashed in India or abroad, especially Swiss?

Some people believe that their own economic mistakes are due to nefarious forces removing wealth from the country. But why do people want to remove wealth from India - it's because of the mistakes.

The government has been postponing the Direct Tax Code. Will the budget throw any light on this?

The budget will offer more talk but little action will ensue.

The debate on Goods and Services Tax has been going on for few years, but nothing concrete has emerged so far because of different parties ruling different states preventing the implementation. Will the government be serious this time to come out with a firm date of implementation?

The government's failure to insist on this has been a serious mistake. Apply the GST to those states that are willing to accept it. The others will be forced to come along eventually.

Power sector needs government attention. While some States are surplus in power, others are having big deficit. How is the power deficit going to be managed and how can surplus power in states be transferred to deficit states? Can we expect a road map on how this can be achieved in the budget?

Power is another instance of the failure to establish a unified Indian market due to state economic barriers. A short-term incentive to ship power across states is reasonable.

Going by the recent decision on oil price and curbing of gas supply, the budget will likely to provide lower subsidies. However, given the fact that this could be a last full-fledged budget before the next Lok Sabha elections in May 2014, will the budget contain more populist schemes to woo the voters? 

There will be at least one high-profile populist scheme. We can hope there will be only one, put in as a distraction from fiscal responsibility elsewhere.

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