Mukherjee's Budget Woes: Inflation, Deficit, Taxes, And Reforms

WHEN FINANCE Minister Pranab Mukherjee delivers his sixth budget he will have to address the issues related to high inflation, tight liquidity, and rising current account deficit. Subsidies are becoming difficult to manage and there is a feeling among businesses that UPA-2 is not doing much on the policy reform front.

All therse factors are holding back our economy. So Mukherjee has the difficult task of putting the economy back on track as well as keep people from all socio-political classes happy. This will be an onerous task.

Inflation has been difficul to curb, and prices have remained high through the last year. Rising inflation has reduced purchasing power and also offset the hike in the tax exemption limit announced in the last Budget.

On the other hand there’s a chance that another tax exemption will be hiked. If this step is taken it will be in line with the Direct Taxes Code (DTC). The DTC, which aims to simplify income tax structure, has been cleared by the Cabinet in August, 2010. According to the DTC, income up to Rs. 2 lakh will be tax-free, Rs. 2-5 lakh would be taxed at 10 per cent, Rs. 5-10 lakh would be taxed at 20 per cent and income over Rs. 10 lakh would attract 30 per cent tax.

To compensate for the shortfall in revenue through direct tax, Mukherjee might increase the service tax by 2 per cent. This will generate between Rs. 12,000 and Rs. 15,000 crore more.

An increase in excise duty on the same lines might be done.

To bring down the fiscal deficit to the targetted level (5.5 per cent), the government must have a plan to address the subsidy problem. Subsidies are likely to be Rs. 1 lakh crore this fiscal. Plus, rising prices of crude has increased the subsidy bill for the government.

The finance minister will have to do a neat balancing act between revenue receipts and expenditure, given that there won’t be any 3G windfall like in the last fiscal year.

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