The Hindu : Reversing distorted perspectives

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Monday, Mar 11, 2002

Opinion

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Reversing distorted perspectives

By S. L. Shetty

Unless there is a systematic expansionary impulse from fiscal and monetary policies, a substantial revival is not possible.

AMONG THE 12 regular Union budgets in the post-reform period, including Yashwant Sinha's earlier four, the latest one should stand out for seeking to reverse some of the distorted perspectives that have tended to confuse fiscal prudence with fiscal compression. Almost all elements of those untenable policy perspectives, which governed the fiscal policies of the past 12 years and inflicted irreparable damage on India's economic system, have been jettisoned by Mr. Sinha, at least in thought.

For the first time in these 12 years, the Finance Minister has not attempted to reduce gross fiscal deficit rather significantly below 5 per cent. "I have knowingly settled for a higher fiscal deficit (5.3 per cent) because I thought this is the way to move the economy forward," Mr. Sinha confided in a post-budget interview. A policy which results in persistent contraction of public expenditure on development heads and capital formation will in the medium-term achieve neither growth nor reduction in fiscal deficit.

Second, Mr. Sinha has sought to discard capital-market-centric budgetary policies pursued hitherto. With the reimposition of tax on dividends in the hands of recipients, he has corrected one of the blatantly iniquitous measures in operation in recent years. Third, he has asserted the need for raising the share of direct taxes, which as a ratio of GDP is unduly low at about 3 per cent. Considering the fact that income tax rates on individuals (marginal 30 per cent) and corporates (35 per cent) are low as compared with those obtaining even in advanced countries, the imposition of a 5 per cent surcharge on income and corporation taxes (additional 3 per cent) should only be considered as a meagre extra burden. Likewise, a staggered slab-wise application of the hitherto 20 per cent tax rebate on certain specified investments is justifiable on both revenue and egalitarian considerations. The grant of 15 per cent additional depreciation for industrial investment in plant and machinery (with an estimated revenue loss of Rs. 6,000 crores) accepts the theme, hitherto rejected, that selective incentives should be part of a discriminating fiscal strategy. In the same vein, Mr. Sinha has cut interest rates on small savings only by 50 basis points as he sought to weigh the interests of those who depend upon interest income for their livelihood and those of the industry seeking more drastic reductions in real interest rates.

A fourth subtle departure from the post-reform policy concerns the acceptance of the imperatives of undertaking special employment programmes as well as food-for-work schemes to help generate employment and reduce poverty in rural areas. It should be conceded that the Government's conversion into this philosophy of undertaking special employment programmes has been forced on it because of its own faulty policy of building food stocks to the unsustainable level of more than 60 million tonnes. The generally positive experiences of the 1980s in expanding rural non-farm employment growth and also widening the demand for industrial goods as a result of these programmes (combined with large expansions in bank credit) provide a strong case for making these schemes a permanent feature of economic management.

Finally, Mr. Sinha's latest budget has conveyed a decisive view that public investment has a significant role to play, particularly in infrastructure, in the current stage of development. Even so, attempts by Mr. Sinha to enhance central plan outlay by Rs. 16,182 crores (or by 12.7 per cent) or total plan expenditure by Rs. 14,346 crores (14.5 per cent) for the year 2002-03 over the revised estimates of the previous year are indeed modest. Amongst the sectoral plan outlays, the only sector to receive some enhanced allocation is energy where there is an increase of 21.8 per cent. Many of the expenditure programmes proposed for the power sector are conditional upon the States undertaking reforms. However, experience shows that with only marginal capital expenditure on balancing equipment etc., it is possible to augment additional power generation among the State Electricity Boards; it is hoped that this aspect of power development is not ignored even as emphasis is given to transmission and distribution. Within the transport sector, the emphasis has been more on road transport and highways, wherein the revised estimates overshot the budget estimates for 2001-02 by 9.1 per cent and allocations have been further enhanced by 27.1 per cent for 2002-03. In other areas, either the revised estimates for 2001-02 overshot the budget estimates by a large margin and hence fresh allocations have been moderate (rural development) or there have been large shortfalls followed by sizeable increases in the budget (railways).

Expenditure under social services has been raised by 19.7 per cent which is the result of a 29 per cent rise in the Central plan outlay for the Ministry of Health and Public Welfare and a 27.8 per cent increase in the outlay for Human Resources Development. Within the latter, the Department of Elementary Education and Literacy gets a 30.7 per cent rise, while the Department of Secondary Education and Higher Education gets 16.8 per cent.

In the area of social services, more than 80 per cent of Government expenditure is incurred at the State-level. Towards that end, States' net resources from the Centre will be increased by Rs. 13,069 crores (18 per cent) including the additional transfer of Rs. 8,000 crores from out of the small savings collections to be effected from April 1, 2002.

The decision to transfer the entire 100 per cent of net proceeds from small savings to the States as from April 1, 2002, may affect the Central finances, as for the present, the budget has retained Rs. 8,000 crores as a capital receipt for the Central Government; the gross fiscal deficit of 5.3 per cent is inclusive of these small saving receipts. The worry about the Central finances should, in fact, be more on account of the possible shortfall in tax receipts. While the nominal GDP is estimated to rise by about 10.7 per cent during 2002-03, revenues from direct taxes (excluding Rs. 6,000 crores of fresh levies) are estimated to rise by 18.2 per cent to Rs. 91,166 crores, thus visualising a huge rise in buoyancy. Such a high buoyancy has of course not been visualised in the case of excise and customs duties.

All these newer perspectives in the form of raising more direct taxes and increasing development expenditure, though in a right direction, will have only marginal effects on the working of the economy, for they cannot add up to any sizeable push to the development process. As a result of persistent reductions in tax to GDP and development expenditure to GDP ratios for over a decade, the resources of the economy have been dissipated and its vitality eroded. Just to give one example, the resultant resources released to the economy have been used up to the extent of as much as Rs. 20,000-25,000 crores in imports of gold and silver every year. Also, one cannot be sure if the newer perspectives have a degree of genuineness or they are just tactical moves to get out of the impasse as in the case of the use of food stocks today. Unless there is a systematic expansionary impulse from fiscal and monetary policies, a substantial revival is not possible.

(The writer is Director, EPW Research Foundation, Mumbai.)

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