FM should cut cess, taxes on fuels and surcharge on income tax: Chidambaram

Finance minister must find out answers as to why India Inc. is not investing, says Congress leader

Finance minister Nirmala Sitharaman should put more money in hands of the people by cutting cess and taxes on fuels as well as surcharge on personal income tax, Congress leader and former finance minister P Chidambaram has said days ahead of the Budget. Chidambaram, who has presented nine budgets, the second highest after Morarji Desai, spoke to Indivjal Dhasmana about allocation to education, health, PM Kisan, MNREGA like urban schemes and the glide path for fiscal deficit.

Here are edited excerpts from the interview.

The Budget for 2023-24 will be presented at a time when headwinds of a global economic slowdown are there. What do you think the Budget should do to make India's economy immune to these developments?

I don't think India can be immune to what has been happening around the world. That is a pipedream. The world is slowing down. It will impact India. For example the OECD's latest estimate for the world economic growth in 2023 was 2.2 per cent. But on Thursday, the United Nations estimated that world growth will be 1.9 per cent in 2023. At least most advanced nations will go into a recession. That will affect our exports. That will affect capital flows into India. That may even increase prices of some commodities. We will be affected. To pretend that we will not be affected, I am afraid, will be naive.

In your recent article in the 'Indian Express' you wrote that the first advance estimates showed that economic growth is being led by consumption but consumption is being affected by high inflation and rising unemployment. What can the budget do to make inflation less and increase employment?

I don't know how much revenues will be there and what will be the amount of capital expenditure that the government is planning. It is very unclear. India's economy being the consumption-driven economy, the other three engines of growth must be stimulated. When I asked the finance minister in the last session—which are the promising engines among the four—she was cautious about private investment. She expressed a hope about exports. But that is neither here nor there. Therefore, the real question is if the demand will be lower, the consumption-driven growth will be affected. They must ensure that more money is in the hands of the people, especially the tax-paying class. Clearly in my view capital expenditure is good and will perhaps continue to be brisk from what the finance minister has said. She should do something about boosting exports and she should do something about leaving more money in the hands of consumers.

Does that mean increasing the threshold for personal income tax or tweaking the tax rates?

I am opposed to multiple systems of taxation. They (the government) have already messed up with a very neat system of taxation which comprises 10, 20 and 30 per cent rates. Ten per cent was for the initial bracket and 30 per cent for the top bracket and all else between at 20 per cent. They have mugged it up by introducing a no-exemption tax regime. There are not many takers for it. I am afraid they will be tempted to push their pet theory of no-exemption tax system and give some concessions there. I think she (the finance minister) should do something about leaving more money in the hands of the people. This means she can incentivise savings; she can cut the surcharges. Without affecting the basic structure, I think there are three or four options available to the finance minister. I would like to see which option she picks. I think she could cut the surcharges, she could reduce the cesses and taxes on petrol and diesel.

In recent times, the union government has resorted to imposing surcharges and cesses which also reduce transfers to the states. Should the Budget also cut these to give the states their dues?

That is completely wrong on the part of the union government. The finance commission recommended that devolution to the states must be 42 per cent and after Jammu and Kashmir were dismembered into union territories, it became 41 per cent. But effectively only about 30 per cent is devolved to the states. Clearly the central government is profiting at the cost of the states. I think the devolution formula designed by the finance commission must be adhered to. That is an independent thought and independent cardinal principle. As far as what the central government can do to leave more money in hands of the people I have already said the obvious thing is to cut the prices, either through cuts in taxes or cesses of petrol and diesel, and cut the surcharges on income tax.

You said that the finance minister had agreed that private investment is muted. Should the budget continue its focus on capex?

It should because they are pursuing a theory which says the public investment will crowd in private investment. I had not heard of it before the BJP came to power. They may be right; they may be wrong on economic theory; I am not going to comment on that. But why is private investment sluggish? When I asked the finance minister in the last session that she had scolded FICCI and CII for not investing, she said it is my business to meet them and urge them to invest. That is all right but you must find out answers as to why they are not investing. They are all cash rich; they have a huge treasury chest in each company. But why are they not investing? She should really look into her government policies to find out why investment has not been happening.

Rural areas are still in distress after Covid. Should the Budget increase allocation to PM Kisan, maybe to Rs 8,000 per household?

PM Kisan is a controversial scheme. PM Kisan goes to the person against whose name the land stands. That means it does not always go to the tiller who is an actual agriculturalist. It goes to many absentee landlords. We have seen reports of detecting huge frauds in the PM Kisan list. I am not objecting to Rs 6,000 or Rs 8,000 per year to actual tillers. But there must be a way by which money can be put in the hands of the people without too much government selection or interference. And the way to do that is to cut GST, cut taxes on petrol and diesel, cut even prices of petrol and diesel. This is an automatic transfer of money to the consumer. There is no selection, there is no human intervention.

Vulnerable sections in urban areas have also come under stress after Covid. Should the Budget try a MNREGA-like scheme in urban areas?

Urban unemployment is over eight per cent, according to CMIE. I think a scheme similar to MNREGA must be implemented in the urban areas. I think one or two states have already implemented some kind of a scheme. But designing such a scheme is very, very complex. I don't know whether the government has done its homework to announce such a scheme in its last year but designing such a scheme to avoid waste, avoid corruption and ensure there is an outcome equal to the value of money spent is a very complex idea.

Covid has led to increased focus on health and education. What should the Budget do to reduce out-of-pocket expenses on health and increase standard of education?

They should step up allocation to health and education. I think a better way is to transfer more money to the states and make sure that the states spend the additional money on health and education. Ultimately, last-mile delivery on health and education lies with the states. It is not enough for the Central government to allocate money in its budget if the states don't have money. The deliverer is the state government in primary health, primary and school education.

Do you think the government should adhere to the glide path of cutting the fiscal deficit below 4.5 per cent of GDP in the next two years given in the Budget for 2022-23?

I don't think their glide path is credible. The projected fiscal deficit for 2022-23 is 6.4 per cent of GDP. At the same time when I asked her (the finance minister) will the target be achieved? She referred to buoyant tax collections. My estimate is they will get Rs 3.25 trillion additional tax revenues. At the same time she said our government spokesmen have hinted that the nominal GDP growth will be closer to 15 per cent and not 11.1 per cent assumed in the Budget. This means that you have got more revenue on the one side and you are sticking to 6.4. If the denominator is larger, the obvious solution to the puzzle is the government is going to borrow more this year. My estimate is they will borrow Rs 40,000 crore to Rs 50,000 crore more. The other aspect is your trade deficit is ballooning. Ballooning is a mild word. Trade deficit is growing by leaps and bounds because our imports are high and exports are sluggish. Trade deficit by the end of November is almost $200 billion. The year may end with $250 billion.

The current account deficit is bound to be high. It is perhaps 3.4 or 3.5 per cent of GDP. So we have got a set of numbers which points to difficult days ahead. In these difficult days how is she going to stick to the glide path that she has spoken? I think there must be a credible glide path to achieve the target. Both the Vajpayee government and the Modi government have missed it more than once. I am not satisfied about the credibility of the glide path they are talking about. They may achieve a 6.4 per cent target this year, but I would like to see whether they have borrowed more or added to overall debt more. Debt has mounted to astronomical numbers. At the end of March, 2014, overall government debt was Rs 55 trillion but at the end of March 2023 it is going to be Rs 155 trillion. It is going up almost three times which requires servicing. Fiscal deficit, trade deficit, current account deficit, borrowing, overall debt numbers are very, very alarming.