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The Budget may hardly surprise

G. Srinivasan

THAT THE 2001-02 Budget has already generated enough hoopla what with the economy perceptibly slowing down on the back of a no-growth in agriculture, an insipid performance growth by both industry and services sector is by now widely known. T he Economic Survey only corroborated the constraints of the economy even as the Prime Minister, Mr Atal Bihari Vajpayee, was talking in terms of pushing the growth rate to the dream 9 per cent. But given the ground realities in the econom y the Finance Minister, Mr Yashwant Sinha, may not have too many surprises in terms of fiscal measures on February 28.

The macroeconomic milieu now is characterised by easy liquidity, a lacklustre capital market and moderate levels of core inflation all of which point to a slackened aggregate demand. The Budget ought to tailor measures to ride out the distinct signs of r ecession. The effect of the Gujarat earthquake is yet to be properly assessed, even as the State Government put the total loss at Rs 20,875 crore. The Centre has already levied a 2 per cent surcharge on income-tax payable by companies and by non-corporat es with income above Rs 60,000 to mop up Rs 1,300 crore for relief and rehabilitation of Gujarat.

While nobody faults this step to provide relief to the victims, the continuance of earlier surcharges on I-T designed for specific purposes remains a sore point. In fact, the National Council of Applied Economic Research (NCAER) recently argued that redu ction in tax rates helps to generate more revenues. Illustrating this, it said if the tax rates, inclusive of surcharge, was lowered and the tax rebate was invested by companies, there would be an increase in real GDP growth. While the loss to exchequer does imply higher deficits, the additional growth also improves tax collection. With the depressed investment sentiment and reduced profit margins in the wake of higher energy-related costs, the tax relief would spur new investments.

The Survey too rightly states that the direct tax reform strategy of reducing rates has paid off and the maintenance of the long-term faith of honest tax-payers dictates that the personal and corporate I-T rates be kept at levels that extirpates any ince ntive for evasion. Will Mr Sinha go by the Chelliah Tax Reform Committee recommendations made in the early 1990s by lowering tax rates or keep at extant levels in the case of direct taxes and not load the tax statute with complexity by heaping tax on tax and earn the illwill of even honest taxpayers?

On the resources front, this fiscal, the target of direct tax would be met only on the I-T side and substantial shortfalls might occur in the corporate tax in view of the none-too-encouraging industrial climate and the downturn across industries. On the indirect front, because of a negative growth in non-oil imports in the first three quarters of this fiscal, initial high estimates on the Customs would turn out to be unrealistic. But while the decline in customs revenue was expected, this was not expect ed in excise revenues. Considering the slowdown in industrial production, the shortfall on this score is inevitable.

The much-touted issue of expenditure control is mainly designed to minimise wasteful expenditure and reallocate funds to public goods, basic infrastructure and social welfare. Here it is germane to note that in the 2000-01 Budget it was mentioned that al l ongoing schemes would be subjected to rigorous zero-base budgeting scrutiny, the manpower requirements of governments would be reassessed by reviewing the norms for creation of posts and fresh recruitment in departments and institutions would be limite d to minimum essential needs. What is more Mr Sinha said all subsidies would be reviewed with a view to bring in cost-based user charges wherever possible. But signs are that food and fertiliser subsidies would overshoot substantially the target as the f inal revised figures are shown up in the Budget.

A scorecard on this promise in the expenditure compression front is in order but any assessment may be dispiriting in that the deliverables are derisory. For instance, in response to a query in Lok Sabha on February 20, 2001, the Minister of State for Fi nance, Mr Balasaheb Vikhe Patil, simply said that considering the factors which contribute to fiscal and revenue deficits, austerity in expenditure alone could have only ``a limited impact on the size of these deficits and as the information is not maint ained centrally, it is not possible to quantify savings on account of issuance of economy instructions''.

So much for promises to practise parsimony in the interests of economy when the bureaucracy is unable to act on steps outlined by their bosses.

What is particularly noteworthy is that the total strength of Central government employees (Civil) as on March 1, 2000 was 38,23,665. But the total expenditure on pay and allowances and pensions of Central government employees (including the armed forces personnel and employees of Union Territories) in 1999-2000 (revised) was Rs 66.055.87 crore. This is despite the Fifth Pay Commission recommendation to downsize the gargantuan staff way back in 1997.

The authors of the latest Survey cryptically remarked that though many observers have noted the large size of government in terms of number of employees, few however realise that this is largely due to the ``bloated size of departmental public enterprise s (DPEs). As such the Survey conveniently seeks conversion of these DPEs into companies for infusing them with commercial culture and subjecting them to market spurs and competitive pressures. This sleight of hand to shift the onerous task of retrenchmen t and redeployment of excess manpower from the system does not seem to be a salutary proposition, given the delicate nature of the issue and the gut feelings of those who have to bear the axe or carry the cross.

While the Survey maintains that downsizing of the government administration per se would not result in much fiscal saving in contrast to the DPEs, its sensible suggestion to do away with bureaucratic controls and to alter the anachronistic command mental ity needs to be given a try; the Survey said this could occur by abolition of all divisions, departments and ministries whose primary aim is to control and direct the economy. Is this cure achievable remains a moot point.

The Finance Minister, as he reads out Part-A of the Budget, needs to recall all the promises he had made to the country in the past three Budgets in this regard and endeavour to incorporate certain drastic measures for downsizing the government machinery if he is to make any meaningful move in the direction of expenditure management.

Arguments abound as to whether the Finance Minister can go in for a growth-oriented and public investment-laden Budget to pull the economy out of the morass of manufacturing slowdown and demand recession of a deleterious nature. Considering that public i nvestment has been on the wane despite nominal increase in Plan outlays year after year, the crucial question is that fiscal fillips that could ameliorate investment climate and, hence, investment are required in times when there is a markedly slower gro wth in investment expenditures.

As budgeting by nature is a dexterous balancing of income and expenditure to leave a little surplus to carry on a range of developmental works to keep the economy afloat, the Finance Minister could also put to efficacious use some of the advantages like substantial foreign exchange reserves, a comfortable buffer-stock of a staggering 45 million tonnes of foodgrains stocks and a booming export from the country and sustained surge in net inflow of invisibles on the back of a dramatic increase in software exports and private transfers.

But the only dark cloud is the escalating energy bill in particular imported crude and petroleum products whose price, though subdued, remains higher than what it was a year ago.

Conscious efforts must be made to stick to the timeframe of dismantling the administered pricing mechanism (APM) in the petroleum sector and align domestic prices of these products to international level so that the revenues to the exchequer would go up.

In sum, as the Finance Minister is all set to unveil his fiscal proposals for the next year, hopes run high that he would make good the lost opportunities of the past and try and consolidate the unfinished agenda of reforms and move forward decisively on the path of fiscal rectitude so as to ensure a non-

inflationary and enviable but feasible economic growth which would veritably make a durable impact on development.