The finance ministry has kicked off the budget exercise for 2005-06, discussing with four ministries the expenditure outlay and areas of austerity measures besides working on the broad contours of tax reforms.
"We had discussions with four ministries including IT and labour," a senior finance ministry official said on Wednesday. Both Prime Minister Manmohan Singh and Finance Minister P Chidambaram have made it clear that comprehensive tax reforms would be carried out to improve Tax:GDP ratio by widening the tax net and there will be a move towards ASEAN level duty structure to spur exports and investment.
At the same time, the prime minister has directed his ministers to lay emphasis on sound financial management and ensure that only realistic and justifiable proposals were put up for expenditure. Singh told the ministers that it was not fair to expect finance minister alone to act as the arbiter of expenditure while all other ministers try to enlarge their shares of the budget pie.
The budget discussions started early this week immediately after Chidambaram put in place a new team of bureaucrats for Budget. He has a new advisor in Parthasarathy Shome, an expert on taxation, apart from new Revenue Secretary K M Chandrashekar and Economic Affairs Secretary Rakesh Mohan, an expert in infrastructure and banking.
Both Expenditure Secretary D Swarup, an expert in budget making, and Financial Sector Secretary N S Sisodia were slated to retire in the next few months, but there are indications that they may get extension to ensure continuity in budget preparations.
The government is gearing up to attract $150 billion of foreign investment in the next five years and the budget is expected to contain far reaching measures to spur investments in roads, airports, ports, power and railways.
Although discussions between the finance ministry and other ministries are an annual feature before the Budget, the talks assumes special importance this year as the government is committed to carry out fiscal consolidation as mandated by the Fiscal Responsibility and Budget Management Act, and to ensure growth momentum, sources said.
The FRBM Act envisages reducing revenue deficit by at least 0.5 per cent of GDP and cutting fiscal deficit by 0.3 per cent annually.
Sticking to the FRBM schedule would mean the finance minister must walk the tightrope of controlling expenditure and augmenting revenues substantially.
While the government is serious about containing expenses, Chidambaram has hinted at major tax reforms in next budget.
There are broad indications that the finance minister would strive to raise the Tax:GDP ratio to over 10 per cent and maintain it higher during the next few years.
The tax reforms are likely to be in line with the Kelkar panel's recommendations although there would be some modifications and fine-tuning.
The panel headed by Vijay Kelkar had laid down the ways of implementing FRBM that included far reaching tax reforms including reduction in corporate tax rate, hiking the income tax exemption limit and phase-out of exemptions.
