Indian PM’s plans for 2012: Raise funds, control spending

Indian Prime Minister Manmohan Singh is pinning his hopes on money-generating reforms like a Goods and Services Tax, as well as controlling government spending, to get the country's economy back on track in 2012, the Indian Express reports.

Fiscal stability was necessary for economic security and to ensure that the country’s sovereignty and self-respect are not endangered, Singh stressed. “India has paid a heavy price in the past for fiscal profligacy. Fortunately we were able to overcome the problem fairly quickly and for most of the past two decades we have been able to hold our head high,” he said.

Fiscal stability, however, has worsened significantly in the past three years from 2.7 per cent of GDP in 2007-08 to 5.1 per cent in 2010-11. Singh said this was mainly because “we took a conscious decision to allow a larger fiscal deficit in 2009-10 in order to counter the global slowdown” . However, the prime minister cautioned, “like other countries that resorted to this strategy, we have run out of fiscal space”.

To restore fiscal stability in the medium term, he said, the most important step was implementing the Goods and Services Tax and pruning subsidies. GST will modernise the indirect tax system, improve economic efficiency and also increase total revenues. Another important step is the phased reduction in subsidies. “Some subsidies, such as food subsidies, are justifiable on social grounds and are expected to expand once the Food Security bill becomes operational. But there are other subsidies that are not and these must be contained,” Singh said.

According to Singh, to achieve sustained rapid growth, “the only way we can wipe out poverty in a sustainable fashion”, India must do more than just halt the current slowdown (while in 2007-08, growth rate was 9.3 per cent, in 2011-12, it is likely to be 7 per cent). “We need to usher in a second agricultural revolution to ensure sufficient growth in rural incomes… Our urban population is expected to grow from 380 million at present to 600 million by 2030. We must be able to provide productive jobs in the non-agricultural sector for this expanding urban population, and we must also be able to expand our urban infrastructure to deal with the expected expansion of the urban population,” he said.

Note: the GST, or value-added tax, is like a sales tax, but instead of being collected only once, it's collected at every sale throughout the supply chain. It's also supposed to be easier to collect, because the seller has a vested interest in declaring the sale. But it would rob the individual states of some powers in setting their own tax rates and regimes.

Most economists say it would not only increase revenue for the government, but also simplify business procedures.