'Focus on improving long-term investor sentiment'

Manoj Vohra, Director of Asia Pacific, Economist Intelligence Unit, says the finance minister must avoid the temptation of increasing tax rates, even on the super-rich.

Given the current challenges, what, in your opinion, would make for a good budget? What measures or proposals would you like to see?
Against the backdrop of a sharp slowdown in economic growth, persistent inflationary pressures, weak currency and an unsustainably large fiscal deficit, Budget 2013/14 should focus on improving the long-term investor sentiment and economic fundamentals. There are three areas which need the finance minister's most urgent attention:

Fiscal consolidation: The UPA's plan to cut the budget deficit to the equivalent of three per cent of GDP by fiscal year 2016/17 looks overly ambitious. Despite the government's strong rhetoric, the roadmap is short on details of how it would meet its objective of trimming the fiscal deficit. The Economist Intelligence Unit expects the budget deficit to widen to the equivalent of 6.1 per cent of GDP in 2012/13. In the next couple of years, tax revenue will not grow as strongly as the government hopes, and we therefore expect the budget deficit to stand at five per cent of GDP in 2014/15. A further modest reduction, to 4.3 per cent, should be achievable by 2017/18. The finance minister needs to go beyond pure intent and put forward a credible plan to achieve fiscal consolidation over the next three to five years. The government needs to address the issue both from the revenue and expenditure side.

Tax and subsidy reforms: The finance minister must avoid the temptation of increasing tax rates, even on the super-rich. The focus should be on broadening and rationalising the tax base instead. The budget should also make progress on steps towards agreement on CST and implementation of GST. While the UPA has shown some willingness to eliminate fuel subsidies, a credible roadmap is still missing.

Infrastructure and education: India's public spending on education and infrastructure is glaringly inadequate, given its large young population and decades of under-investment in physical capital. To gain from its demographic dividend, India needs to invest in its physical and human resources. In the education sector, the government needs to look beyond primary education and address inadequacies in the secondary and higher education sectors too. The budget must include proposals to further encourage private sector participation in education and infrastructure.

Given the constraints the government faces in raising revenue, do you see a case to increase income tax rates on the rich?
I think the finance minister should avoid increasing income tax rates on the rich. It will send a negative signal to investors and entrepreneurs. The focus should be on broadening and rationalising the tax base instead.

If the budget does not meet expectations, do you fear that business sentiment would once again dip?
Yes, it may dip temporarily. However, the budget is just one of the many occasions the government has to make policy announcements.

What other steps can the government take?
The government needs to invest more in higher education and open up the media sector further for foreign investment.

Which budget, in the recent past, do you remember as having been a good one?
India's budget for 2007/08, presented by P. Chidambaram, can be considered a good one, given the constant reality of coalition politics in India. The budget wasn't a perfect one, but it did aim to improve the economy's long-term prospects by investing heavily in education and health.