The Hindu : Unravelling of the budget

Online edition of India's National Newspaper
Monday, Mar 25, 2002

Opinion

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Unravelling of the budget

IN RECENT YEARS Union budgets have been known to quickly run aground, but the budget for 2002-03 is in danger of setting a precedent by unravelling even before the financial year has begun. After tasting success in LPG prices, the Opposition and some members of the ruling NDA coalition have broadened their demands for a rollback of a large number of tax and subsidy reduction proposals. To add insult to injury, the Union Finance Minister, Yashwant Sinha, has had to hear senior office-bearers of the BJP assure the party cadre that important tax proposals will be rescinded altogether. The main focus of the demands is a withdrawal of the 5 per cent increase in urea prices, the restoration of tax concessions on small savings for those with annual incomes of up to Rs. 5 lakhs, the abolition of the subsidy cut in kerosene and, in some corners, the retraction of the proposal to tax dividends in the hands of the recipients. If Mr. Sinha agrees to all or even most of these demands, one leg of his budget — fiscal consolidation — will be removed altogether.

It is easy to blame the politics of populism for the pressures on Mr. Sinha, but the framers of the budget have to bear just as much responsibility for the mess. Implementation of the more difficult tax and price hikes has to follow some measure of consultation and debate. They also have to be carried out in a holistic manner and not in a piece-meal fashion. Both `principles' were violated by Mr. Sinha. Consider, for example, the partial withdrawal of tax concessions for small savings which has evoked so much protest. Two high-level committees did recommend abolition of these exemptions; to that extent there was a degree of public debate before the budget. But the Parthasarathy Shome committee on taxation had also suggested that a widening of the personal income tax brackets should accompany the removal of exemptions. This would have softened the blow. The Y.V. Reddy committee on small savings had made a crucial distinction between the tax treatment of short and long-term savings, the latter were to be retained while the former were to be abolished. The idea was to encourage savings which could be channelled into investment while aiding planning for retirement. Yet, what the 2002 budget has done is to cherry pick among the recommendations of the two committees. Exemptions have been removed (the only gradation being in two very broad income levels), but there has been no broadening of the tax brackets and, more important, no distinction has been made between the treatment of short and long-term savings.

In the case of fertilizer prices, the experience since 1991 should have shown how politically difficult it is to address the issue even when the increases are as moderate as proposed in the budget. Instead of generating political legitimacy for the price revision — as the Finance Ministry has done with moderate success on VAT by getting a committee of State Government Ministers to work out the modalities — the budget this time sprung the price hike on the agricultural sector, producing a reaction that should have been expected. This should have been more than obvious considering that all decisions in agriculture are measured against the yardstick of prices. On kerosene prices, Mr. Sinha could keep arguing that the decision was taken by the United Front Government in 1997 and that it has been known for years that the gradual phase-out of the subsidy would begin on April 1, 2002. True, except that by focussing entirely on the subsidy the Government forgot that there was the larger issue of providing adequate supplies of kerosene to consumers, and simultaneously ending the large-scale diversion to adulteration of petrol and smuggling that is taking place. If Mr. Sinha now finds himself under siege on a variety of fronts, he has only himself and his officials to blame.

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