The Telegraph
Since 1st March, 1999
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- This budget will not leave anyone very happy

The budget being announced today has raised monstrous expectations. Reductions and restructuring of personal income-tax slabs and rates, corporate income-tax rates, minimum alternate tax, excise duties on almost every product, general customs duty reduction; additions to the range of services to be taxed; special interest rates for small savings schemes for senior citizens; new cesses to be levied (in addition to those on petroleum products for the road development fund and on all taxes for the education fund) for other special causes like employment guarantee; a new bonanza for stock markets as the sales of shares in the central public sector are set to gather pace. There is no way in which the finance minister will satisfy all these expectations.

There are similar high demands on expenditures. I had pointed out in this column last year that the previous budget was long on promises of social and agricultural expenditures, but very short on financial provisions. All those promises must now be met. To quote from what I had written: 'The NCMP 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. The budget speech devoted considerable time to the schemes proposed for agricultural development, rural employment, education, health and food for the poor. But expenditures proposed in the budget belie the expectations from the speech. Most expenditure proposals follow the proposals in the National Democratic Alliance government's interim budget.

'The increase in expenditure provided for agriculture is hardly Rs 400 crores. But on agricultural research and education, it is over Rs 1,200 crores. The renovation of tanks and water bodies was a 'dream' of the FM 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 BE. Health (a high priority in the NCMP) 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 crores. 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 (a major priority in the NCMP) sees a reduction of over Rs 4,000 crores, 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.'

All right-thinking economists and managers want subsidies to be pruned through better targeting and the elimination of waste. No political party has had the courage to change the subsidy mechanism to eliminate the undeserving.

The left is against any change in the existing subsidy programmes. In food, they would prefer the present procurement and public distribution to continue. In power, they would like to see free power to farmers and, for that reason for, continuing ownership of power by governments. They are against any attempt to induce private investment in water and would like the present water-pricing to continue. The urban middle classes have their own dream of substantial public investment in urban infrastructure. Concurrently Central and state governments bear the costs of inefficiency and wasted populism that benefit undeserving groups who are not among the poor.

There are other constraints on the finance minister. He has to meet the new requirements of the Finance Commission for support to state governments, he has the as-yet-unknown amount that he will have to pay state governments who lose out on sales tax because of implementing value added tax, he has to find funds to meet the promises of the last budget which were not met, fund the new schemes that the National Advisory Council commit him to. Yet he must meet the requirements of fiscal responsibility and show some reduction in the deficit.

But there are some things he can do. He could rationalize the personal and corporate income-tax slabs and almost eliminate exemptions. He will have to do something to protect the incomes of senior citizens from inflation, but he would be unwise to go beyond the 9 per cent on deposits of up to Rs 15 crore in the Post Office Senior Citizens Scheme that is already operational. He must make trusts and charitable societies that produce huge tax-free surpluses (management and computer schools, professional and business associations, and so on) pay at least a minimum tax. With MAT, he could allow set-offs against profits in the next year. He should not eliminate MAT. He could even look to extending it to tax holiday businesses like exports and information technology.

Corporate tax rates are at sensible levels and need not be touched, nor must the dividend or capital gains tax be restored. He might look for ways to offer the same freedom from tax to all mutual fund investments while preventing large investors from benefiting to excess from it. All tax-free or concessional perquisites must be eliminated and all employees, including government employees, paid lump-sum salaries to use as they wish.

There must be a significant expansion of the list of services to be taxed. With Chidambaram as finance minister, this is the best time for services like those of lawyers to be taxed. So also with accounting and auditing and other such professional services.

Divestment into the market of public enterprise shares must proceed. It retains government ownership but the pressure of domestic and foreign private shareholders will help to minimize the debilitating control of past years by ministers and bureaucrats. Import duties will no doubt be rationalized further, both in rates and in the unreasonable ad valorem duties, particularly for petroleum products and textiles. If the finance minister can deliver on his expenditure promises in the last budget, it would be a great achievement. But he has other demands for support to state governments, tsunami relief, VAT compensation, and so on. He might be well advised to institute more dedicated funds for social expenditures.

For infrastructure investments, dedicated funds are a good route to follow. The use of foreign exchange reserves to lend for such investment in lieu of external commercial borrowings and as leverage for other funds might be good policy. Allowing provident funds to invest in infrastructure with government guarantees is a way to meet the extra costs of the high 9.5 per cent return now promised to the provident funds. Subsidies must be rationalized, and we must extensively test schemes (like food stamps) in replacement. The pilot scheme for renovating rural water bodies and the proposal to stimulate horticulture must now become reality. Procurement might be extended to dry land crops to reduce the incentive to move to water-intensive crops thereby depleting groundwater.

This budget will not leave anyone very happy. The left's unhappiness might be moderated by high social expenditures. The stock markets will not welcome it because they will not get the immediate gains in share values, but when the scale of government investment is appreciated, both the economy and stock markets might respond. The urban middle class will be unhappy because their goodies will not decline in price. The poor and the small and marginal farmers might be a little happier if the expenditures proposed for their benefit actually reach the benefits to them.

Budget 2005 must devote maximum attention to processes and institutions to ensure that expenditures are made and that the expected benefits are delivered to the targeted groups.

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