This is the second time that Palaniappan Chidambar- am has had to present a Union budget with barely forty days of preparation. That’s akin to taking the final chartered accountancy exam with just a fortnight’s swotting. If you do that, then chances are that you will fail. That Chidambaram has passed is good enough for me. With a fractious coalition, an expenditure-biased common minimum programme and little scope for fiscal cleansing in what is left of this financial year, having presented a generally reform-oriented budget is a creditable achievement.

Let me start with what I have liked in this budget. Three weeks before D-day, I was chatting with some friends in insurance. None of them expected sector-specific reforms in this budget. In fact, I underscored their views by saying, “The FM has just begun his innings. While he would love to increase the FDI cap on insurance, I am sure that neither he nor the prime minister nor Sonia Gandhi will immediately risk the ire of the left. I expect a rise in the FDI cap in February 2005, not in this budget.”

Chidambaram has proved so-called analytical experts like me dead wrong. Not only did he raise the cap on insurance from 26 per cent to 49 per cent, but he also did better by increasing the cap on telecom from 49 per cent to 74 per cent, and individual limits for foreign institutional investors on debt funds from $1 billion to $1.75 billion. The signal is unambiguous: this government will not brook empty ideological opposition to foreign investment — especially in the core sectors of the economy.

Predictably, there has been opposition from the perennial antediluvians along tired and hackneyed lines. Regarding telecom and civil aviation, it has been about security — as if the moment foreigners account for 74 per cent of the equity in Sunil Mittal’s or Ratan Tata’s companies, they will immediately install complex gizmos to electronically eavesdrop on the prime minister’s office. Or when Naresh Goyal gets 49 per cent FDI, he will put satellite cameras on the belly of each Jet Airways plane to map the country and send it to the CIA. Regarding insurance, the opposition is even more absurd: it is being labelled as anti-people and as backdoor privatization. One only hopes that the SMP troika (Sonia, Manmohan and PC) will pay no heed to such opposition and won’t roll back any of these proposals.

Time now to move on to some key numbers. The budget has proposed a whopping 20 per cent growth in plan expenditure to Rs 145,590 crore for 2004-05. While the additional outlay of Rs 24,083 crore may be a bit on the high side, given the focus of the CMP on health, education, agriculture, employment guarantees and food-for-work, one would have expected a growth in plan expenditure by about 15 per cent. It isn’t that much off the mark.

Of course, it is a different matter as to how much of this extra Rs 24,083 crore will actually go to where it is intended. State administrative machineries are notoriously inefficient, and most Centrally administered programmes are no better. Since turkeys have never voted for Thanksgiving, administrative reforms are the toughest of them all — and I’d be surprised if even a fifth of the outlay actually reached the truly needy and poor. Equally, it could be argued, as Chidambaram has, that one can’t wait for a mega-administrative clean-up before increasing allocations.

Good budgeting is to slightly overstate expenses and understate revenues, and then give everybody a pleasant surprise. This is where I have some concerns. My first worry relates to the Rs 20,259 crore reduction in non-plan expenditure — from Rs 352,748 crore in 2003-04 to Rs 332,239 crore in 2004-05. The big-ticket items in non-plan are interest, defence, subsidies, grants to states, and wages, salaries and pensions. Interest is going up by Rs 9,025 crore; defence expenditure is budgeted to increase by Rs 16,700 crore; while subsidies are expected to fall by Rs 1,193 crore, it is unlikely that these actually will; grants to states are to go up by Rs 3,801 crore; and emoluments to the 3.4 million direct Central government employees (excluding railwaymen) is anticipated to rise by Rs 1,803 crore. So, I can’t see a decrease in non-plan expenses — although by a sleight-of-hand involving an ill-understood and peculiar creature called “small savings”, Chidambaram has done his magic. I would have been more circumspect about non-plan expenditure and targeted a 2-3 per cent growth, with the hope that I would keep it flat at the end of the day.

Of greater concern are the revenue assumptions. At Rs 233,906 crore, this budget projects a massive 25 per cent increase in the net tax revenue to accrue to the Centre. That is unprecedented in the annals of Indian public finance. Topping the list is a huge 40 per cent increase in corporate tax collections from Rs 62,986 crore to Rs 88,436 crore — something that has never happened before. Personal income tax is expected to go up by 26 per cent and service tax by 70 per cent. True, the pandal-wallahs and pollsters will now have to pay the 10 per cent service tax. But with the transport operators still out of the net for fears of a truckers’ strike, it will be tough for the government to garner the additional Rs.5,850 crore.

What do these tax revenue numbers say? If the real economy were to grow at 6.5 per cent and inflation at 6 per cent, then we would be looking at a nominal GDP growth of 12.5 per cent. What Chidambaram is saying is that corporate tax collection will grow more than three times faster than nominal GDP; personal income taxes will grow twice as fast, despite those earning Rs 100,000 or less being out of the tax net; and service tax revenue will grow more than five times as much. Tax experts are naturally worried about such estimates. Moreover, with disinvestment receipts set to fall by Rs 10,500 crore compared to last year, the revenue situation doesn’t look very promising.

Therefore, I see three scenarios. First, given the slothfulness of most ministries, the plan expenditure will be a good deal less than budgeted. Hence, even if the revenues are not achieved, the fiscal and revenue deficits will be more or less in line. Second, the finance minister will speedily settle cases involving arrears of taxes, and bring that amount into the books. We don’t know how much that will be, and Chidambaram isn’t telling. Third, he will have a higher revenue deficit at around Rs 90,000 crore, instead of Rs 76,000 crore. Even so, his revenue deficit will be a bit under 3 per cent of GDP — which will still be a laudable reduction from 3.6 per cent in 2003-04. As a budgeting exercise, therefore, I would have preferred the FM to shoot for this more realistic deficit target. The last thing he needs is the budget getting unstuck on account of optimistic revenue projections.

Last words? As a 40-days exercise, this is a pretty good achievement. Like before, I expect the real big-bang budget the second time around. So watch out for 11 am on Monday, 28 February 2005.