The United Progressive Alliance government has not produced major policy initiatives beyond the common minimum programme and CMP-like pronouncements in the prime ministerís speech to the nation or the presidential address to parliament. Consequently, considerable attention focusses on the budget as an indication of how the UPA proposes to increase and broad-base growth, increase employment and extend feel-good beyond its perceived narrow urban confines. After all, Mr P. Chidambaram is labelled as one of the architects of the original reform process, subsequently reinforced by his producing a dream budget that later turned into a nightmare. Many policy initiatives to broad-base and increase growth or stimulate public and private investments are long-term, and short of an agricultural credit package. It is not evident what the finance minister can do, especially because the UPA has not been around long enough for consensus generation.
However, there may be an announcement about an investment promotion body, with the present Foreign Investment Promotion Board junked. Beyond homilies and pious attentions, the budget will be tested on three parameters, the fiscal stance, tax reform and expenditure proposals. The Fiscal Responsibility and Budget Management Act has been in force since August 2003. In the form in which the act was eventually passed, all time frames except the terminal one have been removed and that target requires the revenue deficit to be eliminated by March 2008. Indeed, this is the only instance where the CMP has a precise time frame, with March 2009 indicated for a zero-revenue deficit, presumably on the argument that the UPA government took over in 2004 and not 2003. This requires reduction in the revenue and fiscal deficits by 0.5 per cent of the gross domestic product every year. With the economy having done well in 2003-04, and slated to do well in 2004-05, the reduction target is not a problem this year. But it can be a problem subsequently. While the act does not require the finance ministry to do so, it is expected that Mr Chidambaram will introduce a medium-term fiscal policy, with annual targets for deficit-reduction. If nothing else, this will constrain populist expenditure, and even the Sixth Pay Commission that the UPA constituents are pushing for. On tax reform, exemption removal à la Kelkar are unlikely, although it is possible to junk open-ended exemptions.
A cess to fund education is certain. With value added tax postponed to April 2005, any hike in service sector taxation rates or reductions in import duties are unlikely, though rationalization of both excise and import duties is possible. Despite questionable net revenue accretion because of enforcement problems, more service sectors are certain to be included in the tax net. And in an attempt to boost revenue, a turnover tax in the capital market may replace capital gains, short and long-term, even though its economic rationale is questionable. The CMP commits the UPA to increase public expenditure in physical and social infrastructure sectors, especially rural development. Unfortunately, the Centre has no efficient delivery mechanisms and incentivization of state-level reforms is difficult.