The Hindu : A cautious budget

Online edition of India's National Newspaper
Saturday, Mar 01, 2003

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A cautious budget

THE UNION FINANCE Minister, Jaswant Singh's first budget is a pragmatic one, which combines a modest fiscal package for more rapid growth with sector-specific concessions and incentives. This may not be a budget of major giveaways that has an eye on the polls, but with the economy in the midst of a slowdown the Finance Minister has sensibly refused to adhere to fiscal orthodoxy. The Union budget for 2003-04 does offer tax sops to a wide range of taxpayers and, aware of his party's directives, Mr. Jaswant Singh has refused to bite the Kelkar bullet on removing exemptions and reducing tax rates. If anything, the budget expands the exemption raj and at the same time reduces some tax rates, which was precisely what the Kelkar task force had warned against. At the same time, the budget is not without a sting in the tail. There is the higher cess on motor spirit and diesel (which is strange coming as it does when global crude prices have touched the $40 a barrel mark), a cess on specific commodities to replenish the National Calamity Contingency Relief Fund and the service tax has been uniformly raised from 5 to 8 per cent even as 10 new services have been brought into the tax net. All these measures could push up prices, albeit modestly.

The centrepiece of the budget is, however, the restoration of some realism and integrity to the budgetary process even as Mr. Jaswant Singh has looked for innovative measures to finance investment in infrastructure that would accelerate growth. The highly unrealistic budget projections for 2002-03 (which included fanciful estimates of a 20 per cent growth in tax revenue) have come to nought and the drought was not the cause of the numbers going awry. Expenditure has been kept under control in the current fiscal year, but the slippage has been on the receipts front — tax revenue has fallen short of the target and disinvestment proceeds will of course be just a quarter of the projections. For next year, the budget has pitched gross tax revenue growth at a more modest 13 per cent though once again receipts from disinvestment have been projected at a large Rs. 13,200 crores. Revenue receipts are budgeted to increase by a shade over 7 per cent and total expenditure by 8.6 per cent. The result is that the fiscal deficit next year is estimated at 5.6 per cent of GDP, which is higher than the 5.3 per cent level that was budgeted for 2002-03. If the Finance Minister has chosen to relax the purse strings, this does not mean that the budget provides for a substantially higher Plan investment. The Central Plan next year will be 8 per cent larger than this year and gross budgetary support for the Central and State Plans only 6 per cent larger, which does little more than account for the effect of inflation. Since this is as far as Mr. Jaswant Singh thought he could go, the budget has come up with "off-budget" measures to finance investment. The idea of public-private partnerships is the one singular innovation in this budget. Beginning in 2003-04, an estimated Rs. 60,000 crores is to be spent on new road, rail and airport projects, envisaging public money being combined with private funds, with the risks being shared and without open-ended Government guarantees. This may be one way of getting round inefficiencies in public execution of infrastructure projects, without at the same time giving a blank cheque to private enterprises. But this is an idea which is yet to be tested out in the country and there must, therefore, be a big question mark over whether public-private partnerships can fill the gap in investment immediately and on such a large scale.

While the budget has refused to make a virtue out of fiscal stringency, it has not completely ignored the tasks in fiscal consolidation. The most important step it has proposed is the debt swap of high-cost debt, which should over a three-year period immensely help the States. It has also proposed a very small hike in the prices of urea and di-ammonium phosphatic fertilizers to cope with the likely rise in global naphtha and gas feed-stock prices. But going by the initial critical reactions to this proposal it will take considerable resolve by the Government to go through with this proposal. One concern about Mr. Jaswant Singh's package must surely be the continued large reliance the Centre is making on market borrowings. The budget projects market loans next year of as much as Rs. 1,07,194 crores, compared to the revised estimates for 2002-03 of Rs. 99,953 crores. In a regime of soft interest rates, as at present, this may not matter. However, this ever-increasing recourse to market borrowings makes the debt and interest burden on the Government heavier each year. The expenditure category that will show one of the largest increases in 2003-04 is defence where the budget provides for a 17 per cent hike in allocations for revenue and capital outlays. Since actual expenditure in defence has consistently fallen short of allocation, this hike may not materialise, but the Finance Minister has made it clear that if the Defence Ministry makes a case for even larger funding it will be granted.

All said and done, Mr. Jaswant Singh has produced a clever budget which offers something for many groups and demonstrates that a budget should be a product of both economic and political thinking. To signal that he is not impervious to the concerns of the under-privileged, the Finance Minister has announced the expansion of the Antyodaya Anna Yojana, which has been reasonably successful in channelling subsidised cereals to the poorest of the poor. He has also announced a new group health insurance scheme where premiums to be paid by the poor will be partially subsidised. For the urban salaried, who are hardcore supporters of the BJP and were offended by last year's budget proposals and by the Kelkar recommendations, the Finance Minister has offered a higher standard deduction, tax rebates for education expenses, a new subsidised pension scheme and abolition of the 5 per cent surcharge on income tax. For the more well to do, there is the abolition of the dividend tax (the third change in policy in six years) and an experimental exemption from tax of equity long-term capital gains. Individual industries too have been offered incentives, the most notable being the package for the textile industry.

Incentives and concessions are not something to be always frowned upon, but the problem arises when they are put through in an ad-hoc manner under pressure from interest groups. This is most evident in the package on indirect taxes. In line with the Government's long-term approach, the budget has reduced import tariffs on a range of products and also brought down the peak customs duty from 30 per cent to 25 per cent. It is in excise duty that an ad-hocism is evident. Where earlier the Government had put forward a strong argument for bringing all commodities other than essential products into the excise net, this budget has restored exemptions on a number of commodities. Such ad hocism does not make for stability in tax rates and structure, which the Finance Minister asserted would govern his approach to taxation. The same criticism could be made of the hike in service tax, which has no justification other than as a revenue mobilisation exercise.

Mr. Jaswant Singh's projections assume a GDP growth of 6 to 6.5 per cent next year and considering that this pace of growth has not been recorded in the past three years there is a lot riding on the proposals contained in the 2003-04 budget.

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