The Kelkar Committee Report’s Report
Dr Vijay Kelkar along with his associates Indira Rajaraman and Sanjiv Misra came out with what they called it as the Roadmap for Fiscal Consolidation in September 2012. First of all many viewers watching business channels and overhearing about this latest buzz would not even know the proper definition of Fiscal Consolidation. Going by just the name, it seems as if it has something to do with collating various components associated with something called fiscal. Simply speaking Fiscal actually refers to government’s financial matters. It includes both revenues (especially from taxes) and expenditures. Whereas Fiscal Consolidation refers to a government policy intended to reduce deficits and accumulation of debts. The Kelkar committee seems to have been working hard from quite some time to actually relate government’s financial measures with realistic market scenarios. When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings) then it is referred to as Fiscal Deficit. The committee expects India’s fiscal deficit in FY 2012‐13 to be around 6% of the Gross Domestic Product (market value of final goods and services produced within in country in a given period) which comes out to be around INR 108 Billion. The current account deficit (it occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world) is also as high as 4.2% of the GDP. The first economic implication the committee talks about is the twin deficit hypothesis. It explains that to tackle with increased government deficit, there must be reduction in private investments or increase in current account deficit (CAD). The point here to be noted is that why at any point CAD should be increased? The answer is that from economic point of view, in short run, the CAD could be high if the government is promoting local productivity which would lead to higher exports in long run. But in India’s case the CAD is already marginally high hence the CAD then needs to be financed through external capital inflows, government external debt or drawdown of foreign exchange reserves which would lead to inflation. If the Reserve Bank of India auctions government bonds to increase liquidity then it would also lead to inflationary pressures. The government has adopted do‐nothing policy according to committee’s report which leads to three principal problems‐ widening gap between revenues and expenditure, problem of growing twin deficits (CAD and fiscal deficit) and increased borrowing requirement of the government leading to crowding out situation. It is the situation where increased public sector spending replaces, or drives down, private sector spending. It occurs because government borrows large amounts from the market which leads to increase in interest rates. Higher interest rates discourage individuals and businesses from borrowing money, which reduces their spending and investment activities.

The report also lays down emphasis on worsening situations of Oil Marketing Companies (OMCs). In a country where oil imports are over 80% of nation’s net requirement, the importance of OMCs seems most crucial in judging economic situation. There has been ballooning petroleum subsidy primarily due to increased demand and rise in international crude oil prices. The report very well points out that for a nation which has youth increasing at tremendous rate and looking forward to employment opportunities, such economic indicators does not portray a good picture. The report chalks out various reforms and measures to four important macroeconomic structures. Starting with Tax, the committee has pointed out that India’s tax‐GDP ratio is worsening and it has come down to 10.1%. As the name hints, the tax‐GDP ratio is calculated with dividing total tax receipts with the GDP of the nation. Certainly, higher the ratio better off the nation would be. For reforms in Direct Taxes (such as income tax, wealth tax, property tax etc.), the committee has recommended review of Direct Tax Code before it is being implemented because it can lead to huge revenue losses since it would lead to rise in income tax exemption levels, lowering of tax burden and above all the entire tax structure would need to be restructured. Apart from risk management and modernisation, the committee has recommended universal Permanent Account Number (PAN) or Unique Identification Number (UID) system enabling all the functions, verifications and allotments in accordance one single number. For Indirect Tax (such as Sales Tax, customs, duties etc.), the committee primarily recommends speedy implementation of Goods and Services Tax which seems unlikely in next budget session too. The second aspect discussed in the report is associated with Disinvestment. Disinvestment refers to the action of the government to sell off its stake or share it holds in a company to increase liquidity or to generate funds to lower down fiscal deficit. The government aimed to raise INR 300 Billion during the current fiscal year which seems unlikely due to present market conditions and market prices of public sector undertakings (PSUs). The committee recommends disinvestment in companies such as Specified Undertaking of UTI (SUUTI), Hindustan Zinc Limited (HZL) and Bharat Aluminium Company Ltd. (BALCO) as such companies do not play a significant role in boosting government’s revenues and are very much under private control. The report suggests two routes for government’s disinvestment procedures. First is the Offer for Sale where the sale of the investment of government’s stake is open to public for a day. The stake can be picked up using call option model where investors desirous of purchasing these securities may pay a small premium on the date of such decision through the online system that may be provided by the Stock exchanges. The other recommended method of stake sale is through Exchange Traded Funds (ETFs) which is nothing but basket multiple stake sale opportunities by the governments. Such methods would provide retail investors to invest in something other than gold and diversify the risk in the portfolio of the investor.

The third important economic aspect is the role of subsidies. In a brief the committee has obviously recommended narrowing the subsidy bills by raising prices right from petroleum products to prices of fertilizers. Further to the above recommendations, the report has also proposed stringent monitoring planned expenditure (the expenditure which the planning commission estimates) by the government. Also the report gives further importance to supply side reforms. Supply side reforms refer to the restructuring of revenues and expenditure model which leads to increase in taxes and reduction in costs forgoing upon any kind of fiscal stimulus. The Kelkar committee’s report seems very ambitious but there are certain questions or areas of concerns which further needs to be addressed. As of now I am having ice cream which was manufactured somewhere in Delhi and was transported to a local store here in Noida and I guess I travelled by car to get this from the local grocery store. Guess what, after reading the entire report presented by the committee, I am starting to realise that this little thing will soon going to be quite expensive and the increase in price would be at every level if the suggested concept of fiscal consolidation is followed. Supply side reform will increase the cost of manufacturing the ice cream. Increase in price of diesel will lead to increase in transportation costs and increase in sales tax and value added taxes would again lead to increase in net selling price. So the ice cream would either melt because of increased temperature of my hands or I will look also look forward to being more fit by going for a diet. As per the report the recent increase in government deficits, the investment decline, the rigidity of inflation, the pronounced IIP decline and the widening of the CAD are all pointers to a deepening fiscal crisis which means we are heading towards another 1991 like situation? This seems highly unlikely provided the funds government holds as foreign exchange reserves and the funds RBI holds as reserve funds. Furthermore the feasibility of the recommended steps is questionable. For one Foreign Direct Investment thing, the government was at a point on the verge of collapse, how can we expect smooth restructuring of entire tax structure of further economic reforms? For disinvestment purposes, the committee has recommended such procedures which have never been used by government before. What if the negative sentiments lead to decreased valuation of the PSUs? The report also recommends implementation of GST. Imagine a country where the tax rates from 2% to 100% in one go is replaced by a tax rate of either 13 or 14%. How such an action would be taken instantaneously? There needs to consolidation of certain taxes for a period of time and after that one tax rate one policy would come into play.

What I do understand from Dr. Kelkar committee’s report is that it has viewed India’s economy from bird’s eye angle by which I mean that the report is more oriented towards macroeconomic turnarounds. Increasing prices all across the segments and implementing supply side reforms for a layman would seem herculean and not much conducive but from a broader perspective it seems one of the best ways out. Increasing prices would reduce the purchasing power of the people of the country which would reduce the market demand. Reduction in the market demand will force the suppliers to curb their supplies eventually bringing down market supply in order to reach equilibrium levels which would lead to lower price levels. Also this would make the public invest surplus funds in the banks or in securities instead of spending on luxuries or increasing their standards of living. The entire idea seems very ambitious but then for that there needs to be a sharp rise in price levels and that would not be easy in the largest democracy of the world where even a marginal rise in price of diesel leads to nationwide strikes and protests and non‐functioning of parliament not for days but for an entire session. There is no doubt about the fact that the nation is going through one of the toughest economic times but then introducing economic reforms in matter of days where there are chances of economic and financial stability would lead to extreme inflationary pressures. Also in a nation with over 50 regional parties and no single ruling party, it takes bolder and moving against tide kind of actions in order to implement a simple reform measure. The domestic firms must be pushed to produce more, to reinvest their cash piled balances in expanding capacities and stringent accountability must be enforced on publically listed firms so that the funds they raise from public are invested judicially and must reap adequate benefits to the nation.
‐ Chaahat Khattar