The Telegraph
Since 1st March, 1999
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- The budget is simply a statement of the Centreís receipts and expenses

The author is director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi

At this time of the year, economic columnists have no choice. They must write about the budget and I canít buck the trend, even though I think this obsession with the budget is a colossal waste of time. There was a time when direct and indirect tax-rates varied on a yearly basis. Understandably, citizens were inordinately interested in the budget. After all, their lives were affected. With reforms, tax-rates became more predictable. The discretionary element in tax-variations began to disappear and effectively, budgets are now known in advance. This is as it should be and this transparency trend is indeed desirable.

However, there is a caveat to this proposition. Since 1991, budgets have become identified with major policy announcements. At least some people in India want reforms, and these liberalization initiatives are announced through budget speeches, especially part-A of the speech. Hence, reformers are thrilled to bits when initiatives are announced through the budget. The finance minister gets a high ranking if labour-market reforms and agro-reforms are mentioned or a high disinvestment target is set. In all fairness, we should accept that this has nothing to do with the budget.

Had there been no political economy angle in implementing this agenda, these reforms would have been introduced in 1991. There was no need to wait for 10 years and more. Most reforms we want have less to do with the Centre and more to do with the states. Yes, these reform measures are important. But announcing them in budget speeches doesnít get us any closer to actually implementing them. Even at the Central level, most reform measures we want have less to do with North Block and more to do with other ministries. Euphoria at their inclusion in budget speeches and subsequent despondency at non-implementation are both unwarranted.

The present finance minister has more or less told us not to expect such announcements in the imminent bud- get. If reforms happen (which is unlikely given an election year), they will happen outside the budget. Good for the finance minister. Let him not raise unrealistic expectations.

There is yet another caveat to the unwarranted-hype proposition. As citizens, we want to know what is happening to the economy. Will it grow faster' After all, the Central Statistical Organization has just told us how bad 2002-03 will be. Real gross domestic product will grow at 4.4 per cent and no more. (There are serious reservations about this CSO figure, but letís ignore that.) Will inflation be high' Will the fiscal deficit be high' Be realistic. The finance ministerís guess is as good as yours, although he may be privy to a little bit more of information.

There are signs of industrial recovery, the drought wasnít as bad as was originally thought and exports are chugging along. Given the low base in 2002-03, unless a war with Iraq knocks everything for a six, surely we should get a 6 per cent real growth in 2003-04. Perhaps closer to 6.5 per cent if we are lucky. There is certainly no way we will get the 8 per cent promised in the tenth plan. Ditto for inflation.

Unless the war with Iraq leads to oil prices shooting up, why should inflation be more than 4 or 5 per cent' The answer depends on whether we use the wholesale price index or the consumer price index. But that wonít alter the core argument. As for the fiscal deficit, thatís expressed as a share of GDP. It depends on expenditure, revenue and GDP. We would like reports of the expenditure reforms commission implemented. But because that too has a political economy dimension, the finance minister canít do much about expenditure. He canít do much about revenue either.

If industry does well and tax revenue is buoyant, the fiscal deficit-GDP ratio will be around 5 per cent. Otherwise, it will be around 5.5 per cent. Therefore, there is no need for this obsession with budget figures on growth, inflation or fiscal deficits. North Block is wrong more often than it is right. For any year, compare budget-estimates with later revised estimates and with the still later, actual figures.

There is a third caveat to the unwarranted-hype proposition. Everything about taxes will be known in advance after we have truly reformed. We are still in a process of transition and in the interim, the budget is still important. Taxes can and will vary on an annual basis. Constitutionally, the budget is an annual statement of the Central governmentís receipts and expenditure. No more and no less. Without a stamp of approval from Parliament, the government canít spend a paise out of the consolidated fund. Thatís what the budget is about.

Take expenditure first, and this is a repetition of what I have already said. Revenue expenditure (interest payments, subsidies, defence expenditure, pensions) canít be touched. If anything, defence revenue expenditure will have to increase. Plan capital expenditure is already fixed for the finance minister. In addition, defence capital expenditure will also have to increase. Anything up to 90 per cent of expenditure is thus already known. The finance minister can tinker a- round with at best 10 per cent, most of which will involve slashing non-plan capital expenditure. On expenditure, the value addition in the budget is 10 per cent and is that the reason you will sit glued to the television' Ditto for non-tax revenue. The disinvestment figure is completely arbitrary (because it may not be attained) and market borrowings follow as a residual, after one has matched the fiscal deficit figure against revenue.

That leaves taxes and the KTF. KTF sounds like a missile, but is actually the Kelkar task force. Actually, there are two KTFs ó KTF-I on direct taxes and KTF-II on indirect taxes. If there is apparently some uncertainty about the imminent budget, thatís because of these KTFs. Will the recommendations be accepted, or will they be thrown out' Actually, there is no uncertainty whatsoever. Both KTFs harp on procedural simplification and reducing transaction costs. Most (but not all) people like this idea. So clearly, there will be some movement there.

Turn to KTF-I next. Agricultural income taxation' No way. In any case, thatís a state subject. Removal of exemptions on personal and corporate taxes' In an election year and after the Rajnath Singh committeeís recommendations' No way. The dividend tax has to go, perhaps also the long-term capital gains tax. MAT (minimum alternate tax) is more uncertain. Reducing the peak corporate tax rate (for Indian companies) to 30 per cent is good for votes. Increasing the exemption limit to Rs 75,000 (from Rs 50,000 now, as against KTF-Iís 1 lakh) is good for votes. Removing the standard deduction is bad for votes. For similar reasons, housing concessions, infrastructural concessions and export concessions have to stay. And before we forget, reducing the interest rate on small savings is bad for votes.

What about KTF-II' We already know that from April 2003, state-level sales tax will be unified and be called value-added tax. (This falls short of a full-fledged VAT though). We already know that there will be more service-sector taxation, although states donít yet have legislative sanction to introduce their own service-sector taxes. We know the revenue-neutral VAT rates. We know that with VAT, the Central sales tax should go. However, thatís difficult because of revenue reasons. Perhaps it will be reduced from 4 per cent to 2 per cent.

We know that special excise needs rationalization and standardization. But which finance minister will dare to reduce excise on items (soft drinks, cars) that are perceived to be of elitist consumption' We know that import duties should be reduced. But protectionist industry will protest. So for unbound manufactured goods, reduce the peak basic du- ty from 30 to 25 per cent. Industry permitting. And so it goes on. Please tell me what is unknown in all this. This is the time of the year when economists are heavily in demand. But as a citizen, why are you wasting your time'

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