The Telegraph
Since 1st March, 1999
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The finance minister has granted an interview that has little new to offer. Nor does it indicate directions for the budget. His major concerns are sluggishness in global revival, uncertainty about the hydrocarbons sector, availability of quality infrastructure and the need for fiscal consolidation. These do not necessarily reflect right priorities. For example, India’s growth rate of 5.5 per cent against the background of global recession may be good. But for an economy as insulated as India continues to be, targeted 8 per cent growth of the tenth plan cannot be linked to global recovery. Sources of growth have to be endogenous and this means more reforms, especially in fiscal consolidation. On the tax revenue side, Mr Jaswant Singh is right that the tax/gross domestic product ratio should increase and it is laudable that the two Kelkar task force consultation papers have been submitted on time. Both seek to make tax administration modern, transparent and more responsive.

But on other aspects, the Kelkar recommendations have already led to protests. This is true of direct tax exemption removals and the proposal to tax agricultural income. On indirect taxes, the contours of value added tax and service sector taxation are already known, although legislative impediments might postpone service taxation by the states to beyond April 2003. Although Mr Singh wants to accelerate tariff reduction, in the absence of a clear timeframe (which Kelkar does provide) this promise is not credible. Non-tax revenue increases through public sector unit reforms are also unlikely and Mr Singh has admitted what everyone already knew. He continues to be hopeful about Rs 78,000 crore receipts during the tenth plan. There will not be too many takers for his proposition that the disinvestment debate has thrown up some questions and once these are answered, the process will move forward.

On controlling expenditure, such as subsidies, Mr Singh has blamed the political economy. That is neither here nor there. These subsidies do not benefit the poor and are directed at the vocal urban middle class. This vocal segment seems to be his target and his attempts to justify bailouts for the Unit Trust of India, Industrial Development Bank of India and Industrial Finance Corporation of India on moral grounds do not really wash. Hence, there are almost no pointers to budget 2003-04. Nor are there any signs that the fiscal deficit will be contained. Indirect tax revenue is below projections. If the fiscal deficit/gross domestic product ratio is contained at the targeted 5.3 per cent, that will be because defence and plan expenditure have been reduced. This is not the way to reduce fiscal deficits, as Mr Singh himself acknowledges. Both physical and social infrastructure suffer and impose transaction costs on growth. His avowed objective of reducing the revenue deficit is a laudable one. But reading between the lines of the interview, Mr Singh is effectively saying that he has little flexibility. With the state and Central elections due in the next two years, degrees of freedom are even more limited. That does not augur well for the future budget or for reforms.

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