The Telegraph
Since 1st March, 1999
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- No one can accuse Chidambaram of rocking the boat this time

Budget-making in India is never an easy task because it is so difficult to meet the expectations of more than a small number of interest groups. The task becomes infinitely more onerous for finance ministers of coalition governments whose members have diverse ideologies and hence disagree on basic policy prescriptions. P. Chidambaram in particular must have spent many sleepless nights in the run-up to the budget because he himself has very strong — perhaps many would even call them extreme — views on the right mix of policies required to transform the economy. As his “dream budget” of 1997-98 spelt out clearly, he believes in giving a lot of freedom to market forces. On the other hand, this is anathema to the Left Front — an important supporter of the current government.

Despite these contradictions, Chidambaram and his team have managed to cobble together a coherent document. Not even his most ardent supporter will label the budget for 2004-05 a “dream budget”. Equally, his most bitter critic cannot trash it out of hand, at least partly because he hasconsciously avoided any attempt to make radical changes — no one can accuse him of rocking the boat this time around. The budget does make some attempt at spelling out objectives and the means of achieving them. Clearly, Chidambaram believes that it is important to introduce fiscal discipline. There is some attempt to signal the government’s determination to continue with reforms, but this time it is going to be reforms with a “human face”, with a lot of attention being given to agriculture and the social sectors.

The most important feature of the aggregate or “macro” side of the budget is the attempt to reduce the revenue deficit by one per cent in order to restore some degree of fiscal discipline. But, can this target be achieved in the absence of any attempt at additional resource mobilization' The finance minister believes that the Centre’s gross tax revenues will grow by over 24 per cent. It is rather disappointing that we have not been given a detailed explanation of how this is to be achieved. Assuming that the rate of inflation is roughly what it is today, that is 5-6 per cent, and a real gross domestic product growth rate of 7 per cent, the nominal rate of growth of GDP will be around 13 per cent. So, tax revenues must be extraordinarily buoyant if the target is to be attained.

The other side of the coin is the promise to keep a tight curb on expenditure. The budget estimates that non-plan expenditure will grow by only 5 per cent over the budget estimate for 2003-04. In other words, there will be no growth in real terms. This does not seem credible at all, particularly when I see that the budget estimate for 2004-05 is lower than the revised estimate for the past year.

Although I have voiced some disquiet about whether tax revenues will be sufficiently buoyant, it is worth mentioning an important related characteristic of the budget. There is a conscious attempt to extract more resources from the service sector, with more services being brought under the scope of the service tax and the rate itself being increased. This is crucial because this is the most dynamic sector of the economy and there is no hope of increasing the tax to GDP ratio unless this sector contributes more revenue. However, a somewhat contrary policy change is the decision to exempt almost the whole of the cotton textiles industry from taxation, although the decision to roll back Cenvat was ostensibly taken to help the handloom and powerloom sectors. This can result in a sizeable loss of tax revenue. A similar step is the decision to raise the exemption limit for personal income tax to Rs 1 lakh, although the actual tax lost is not very significant. However, this does mean that an even smaller fraction of households will pay any direct tax, and that makes the system very regressive.

The finance minister has tried to demonstrate that his heart is in the right place by announcing a whole slew of measures for the social sectors. Perhaps, the most dramatic is the proposal to levy a cess of 2 per cent on all Central taxes. The proceeds from this cess, which can be as large as Rs 5,000 crore, is to be spent on education, mainly on primary and vocational education. Policies which are similar in spirit are programmes to improve food security, expanding and strengthening anti-poverty measures such as food-for-work programmes. A specific promise in this regard is the guarantee to provide at least 100 days of work for one person per “poor” family. However, after the initial euphoria has passed, questions have been raised as to whether adequate budgetary provision has been made for these programmes, or whether some of the “new” programmes are merely a change in nomenclature, replacing existing programmes which are very similar.

It has been a frequent complaint of the anti-reform lobby that even high rates of overall growth cannot have any significant beneficial impact on the poor unless the agricultural sector too expands rapidly, since the vast majority of the poor depend on the agricultural sector. Perhaps Chidambaram has become more receptive to this view (the other possibility is some arm-twisting from the left) because a large proportion of new plan expenditure is directed towards strengthening infrastructure for the agricultural sector, with “last mile” irrigation projects being promised priority. Other measures to promote agricultural growth include full exemption from excise for agro-processing industries and better farm credit facilities.

In contrast, there have hardly been any broad-brush incentives for the industrial sector as a whole, although some specific industries have received some sops. Despite this, most of the industrial luminaries have welcomed the budget. Perhaps there is a good reason for this. At least the bigger industrial houses are probably satisfied if the status quo is maintained. This is particularly true under the current conditions since successive governments have in the recent past taken many positive steps to improve the climate for industry and trade. What they are particularly apprehensive about is frequent changes in the policy environment because such changes can wreck even the most carefully drawn up plans for the future. Certainly, there is nothing in the budget which queers the pitch of Indian business.

In fact, Chidambaram has managed to signal that the government will continue with at least some reforms. For instance, he has taken positive steps to increase the flow of foreign direct investment by raising the upper limit on FDI in the insurance, telecommunications and civil aviation sectors. This could not have been an easy task given the left parties’ strong opposition to FDI. Equally controversial is the decision to proceed with privatization — the budget aims to collect Rs 4,000 crore from disinvestments. Not surprisingly, the left parties have recorded their protest. To their credit, they have not made this a prestige issue. Perhaps this is a sign of the growing maturity of Indian political parties — they are learning that coalition governments can survive only if there is some give-and-take.

Finally, it is almost ludicrous that the new transaction tax on securities seems to have received the greatest attention in newspapers. The tax affects a miniscule fraction of the population, and it is not even clear why such a tax was not imposed much earlier.

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