The budget numbers reflect more continuity than change. It builds on the “resilient” economy left by the Vajpayee government. It continues with almost all programmes in Jaswant Singh’s interim budget. It is constrained by the contours of the national common minimum programme and the communists. It attempts, while tentatively challenging some communist phobias, to interpret the CMP.
Was India Shining in May' This government seems to say, perhaps, but not for all. It accepts that the National Democratic Alliance left behind a “resilient” economy, no “empty coffers”, and the wherewithal in the economic parameters to enable the claim of dramatic reduction in revenue deficit while talking of new directions. With little time for any new revenue or expenditure proposals to take effect, the budget would be more a statement of intentions, not of practical actions.
The immediate impact of this budget will be on account of the education cess of 2 per cent, the turnover tax on securities transactions, the relaxation on capital gains taxes, the reductions or abolition of customs or excise duties on computers, tractors, farm equipment and so on. There is some doubt whether the adverse impact of the excise duty reductions has been properly calculated. At the same time, the additional revenue generated by the service tax rate increase and new services to be taxed may be much larger.
Does this budget signal any reversal or slowdown of economic reform' For Indian and foreign investors as well as expert commentators, reforms have become synonymous with a list that includes achieving 8 per cent real GDP growth per annum, deficit reduction, interest rate stability (if not reduction), reduction in interest on small savings to reflect the general interest regime, disinvestment through privatization of public enterprises, labour law reform, abolishing reservations for small-scale units, reducing the subsidy burden and making subsidies better targeted, reduction in tax rates (higher slabs for income tax, lower personal and corporate rates, less exemptions, incentives for investments), lowering of import duties, more encouragement to foreign investment, abolishing capital gains taxes, less government expenditure on revenue account and more public investment by government.
Many of these expectations are contrary to the CMP and the demands of the communists. The budget defies the communists by stretching the CMP to undertake some of these reforms. FDI caps have been raised for insurance, civil aviation and telecommunications. Capital gains taxes have been abolished for long-term gains and reduced drastically for short-term ones. Almost 10 per cent of reservations for SSI units are to go. Provident fund rates have been kept in check and not raised, a consistent demand of trade unions and the communists. National Thermal Power Corporation shares are to be sold. If the government can sustain these interpretations of the CMP and does not give in to communist pressures to roll them back, we can expect more such reforms in future budgets.
But the CMP has redefined reforms to emphasize improving the conditions for the poor, rural areas and agriculture. Four out of the seven “clear” economic objectives spelt out in the finance minister’s speech are hardly on the wish list of Nineties-style reformers: “Providing universal access to quality basic education and health; generating gainful employment in agriculture, manufacturing and services and promoting investment; assuring 100 days’ employment to the bread winner in each family at the minimum wage; focussing on agriculture and infrastructure.” The other three are sustained growth of 7 to 8 per cent, accelerating fiscal consolidation and reform, and ensuring higher and more efficient fiscal devolution. The budget speech concentrates on how this government is set to achieve these objectives over the next five years. But the budget numbers barely reflect them.
The CMP recognized that public investment had been declining for almost 15 years in agriculture and that basic needs (drinking water, water for agriculture, quality education and health services, sanitation, housing, roads) had not reached the majority. But expenditures proposed in the budget belie the expectations from the budget speech. Most expenditure proposals follow the proposals in the NDA government’s interim budget.
The increase in expenditure provided for agriculture is hardly Rs 400 crore. But on agricultural research and education it is over Rs 1,200 crore. The renovation of tanks and water bodies was a “dream” of the finance minister and is the most eloquent part of his speech. But there is only a small pilot project provided in the budget. Drinking-water supply has been a priority for all governments from the time of Rajiv Gandhi. It gets about 30 per cent more than last year’s budget estimate. Health expenditures are up by a modest 5 per cent or so. It is not clear why family welfare goes up by 16 per cent. Elementary, secondary and higher education and literacy programmes, despite the substantial accruals on account of the 2 per cent education cess on all taxes, show an increase of only 8 per cent or so, hardly Rs 800 crore. But expenditure on road transport and highways, a high priority of the NDA government, is to increase by over 22 per cent. So is atomic energy, presumably in line with the NDA decision to build more nuclear plants. Rural development sees a reduction of over Rs 4,000 crore, or over 25 per cent. It is clear that the budget speech is not in practice able to deliver on most of its promises in the current year. It is largely a continuation of earlier programmes. Implementing the CMP will require drastic reallocations of expenditures between departments.
A problem in government budgeting is the lapsing of unspent balances each year. Ongoing projects have to wait for fresh budget approvals. This wastes four months or so each year during which suppliers are not paid and projects are either delayed or executed shoddily. There is a case for earmarking funds for specific projects and making them non-lapsable each year. The Road Development Fund (created by the NDA) that gets the cess on petrol is a successful example. Jaswant Singh proposed in the interim budget that a non-lapsable rolling fund be created for defence. Instead of extending the idea to education and earmarking the education cess for the purpose, the idea is to be abandoned. If the fear is that this will not optimize cash utilization, it could have easily been ensured by well-planned cash management.
Power receives little attention except in extending duty concessions to transmission and distribution as well. The introduction of tonnage tax for shipping is hedged to such an extent that new ship acquisitions may suffer.
The finance minister has repeatedly said that his worry is implementation. So it should be. One must wonder whether Central and particularly state governments have the capability to spend large sums on social services while reducing leakage and misuse. There are no ideas in the budget speech to improve the efficiency of expenditures. The stock market collapse because of the new tax on securities transactions suggests that poor planning, which leads to bad execution, continues to plague government.
The number of committees, study groups and pilot projects allowed for in the budget is evidence that this budget is a work in progress. The Planning Commission is to undertake a review of ongoing schemes to see how they fit the objectives of the CMP and then allocate Rs 10,000 crore. Transfer of Central government-sponsored schemes to the states is to await another study by the commission as to how this may be done. A task force will examine reforms in the cooperative banking sector to improve their financial state. A National Horticulture Mission will study how horticultural production may be doubled by 2012. An Investment Commission is to boost private domestic and foreign investment in industry. The National Manufacturing Competitiveness Council is to consider problems of industry. A board is to be created for reconstruction of public enterprises.
The physical distribution of essential commodities under the public distribution system has been a major source of waste, thefts and corruption. The previous government had initiated a pilot food stamps scheme to replace this physical procurement and distribution. The budget proposes a token expansion of this scheme. Even the food-for-work programme, a key element in the rural employment programme, is to be extended only to the 150 most backward districts. Experts have pointed out that a guarantee of 100 days-per-year employment at minimum wage is a token, since average employment is already 180 days.
Many analysts have commented that they do not understand the arithmetic of this budget, and figures do not appear to add up. This applies to the reduction in the revenue and fiscal deficits despite the massive increase in defence expenditures, the large payoff to Bihar (presumably in return for the Rashtriya Janata Dal’s support to he United Progressive Alliance government), substantial excise duty reductions (including the excise duty exemptions for handlooms and power looms), and so on.
Apart from more buoyant revenues, the budget also assumes a real growth in GDP of 7 to 8 per cent and inflation of 4 to 5 per cent. Both these assumptions may be invalid this year. The best estimates so far are for GDP growth of 6 to 6.5 per cent while inflation has already reached 6 per cent. With crude oil prices having now crossed $40 per barrel, coal prices set to rise, higher service tax rates along with more services being taxed and the 2 per cent education cess on all taxes, inflation may well be higher. With lower real GDP growth and higher inflation, deficit to GDP might be maintained if all the other revenue assumptions work out. Many doubt it.
This is a budget that has more rhetoric than deeds. It is testing the extent to which the CMP and the communists will go along with traditional reforms. The legacy of a sound economy allows this government to take another eight months before it puts more meaningful and reliable numbers to its rhetoric. Whether it can successfully channel the economy towards growth, retain overseas confidence and yet benefit the poor and the farmers will depend on how quickly the communists get a course in economic policy formulation. They have to realize that the confidence of the upper classes that they detest is important if the working class is to see opportunity and prosperity.