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Monday, Feb 25, 2002

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Opinion - Budget


Expectations on the Budget

S. Venkitaramanan

The Budget for 2002-03 presents an almost impossible challenge for Mr Sinha. Not only does he have to reckon with a reversal in the fortunes of both industry and agriculture, he has to contend with higher Defence requests, and cater to electoral compulsions. Mr Sinha can, however, draw consolation from the fact that the lower the initial expectations the more certain will it be that the Budget will have a lasting impact.

GREAT expectations were raised by the Finance Minister, Mr Yashwant Sinha's Budget for 2001-02. It set out a number of proposals for restructuring the economy by liberalisation of labour market regulations, changes in the power sector and relaxation of controls on essential commodities. Unfortunately, the implementation has been quite weak.

The latest figures show that the Central tax revenue, net of State share, during April-November 2001 actually declined by 9.2 per cent, against a growth of 16.6 per cent in the corresponding period a year earlier. If this declining trend continues, the Finance Minister is unlikely to reach his fiscal target of 4.7 per cent for 2001- 02.

The same factors that led to a decline in tax revenue in 2001-02 will continue to operate in 2002-03. The Finance Minister has to reckon with a reversal in the fortunes of both industry and agriculture. Particularly, the fortunes of the manufacturing industry have faced a severe decline in the recent period because of the domestic and global developments. This decline is likely to persist.

The Finance Minister's problems are further aggravated on the expenditure front by the continuing tension on the borders.

Media reports speak of a demand by the Ministry of Defence for an outlay of Rs 80,000 crore, against the Budget estimate of Rs 62,000 crore.

A nation's security does not depend merely on the outlays in the Budget. Security ultimately depends on a combination of deft foreign policy and effective use of funds. Recent reports of continuing leakages in Defence expenditure do not also help support the request for higher Defence outlays.

It will be an exercise in futility for India's Finance Minister to try to match by outlays in his Budget the extra inflows of Defence aid from the US to Pakistan.

The Finance Minister cannot, under the best of fiscal circumstances, adequately compensate the diplomatic gains scored by Pakistan. The answer to this lies not only in matching outlays but in a combined diplomatic and political offensive. The Government has to try at the highest level to ensure that the inflows of additional military aid from the US to Pakistan do not create an impossible fiscal and political dilemma for India.

In the current relatively easy diplomatic relations between India and the US, it should not be difficult to convey this message. Balancing Pakistan's increased access to external resources by expanding India's outlays will, in the long run, be counter-productive.

Overall, the Budget for 2002-03 presents an almost impossible challenge for Mr Sinha. Apart from the higher Defence requests, he has also to cater to electoral compulsions. Of his many constituencies, not the least important is the foreign investor. The international investor community looks askance at the slightest hints of fiscal fragility.

Unpleasant repercussions will hit India's rating and, hence, FII inflows. On the one hand, Mr Sinha has a legitimate desire to promote infrastructural investments in India, even by increased public investments. On the other, he is constrained by criticisms of fiscal laxity, particularly from multilateral institutions and the rating agencies.

The Finance Minister will most likely be tempted to impose an additional dose of taxation in order to move the Budget into better fiscal health. In taking these decisions, he has to bear in mind the already somnolent state of the manufacturing industry, which further taxation will worsen. The additional resource effort should not also hurt market expectations.

While on the subject of additional revenue mobilisation, Mr Sinha has already before him the weighty recommendations of the Shome Advisory Group on taxation. It is to be hoped that in implementing them he treads warily, lest he disturb the taxation structure unduly.

The Advisory Group has made a number of controversial recommendations on both direct and indirect taxes. Some of these recommendations will disturb the structure of incentives for savings on which the finances of States and the Centre depend critically.

Equally controversial are the recommendations in regard to further tightening the structure of Minimum Alternative Tax (MAT). The Budget will reveal to what extent Mr Sinha has listened to Shome's calls for radical reform. One hopes that he adopts his customary response of cautionary approach to radical reforms. Too many changes in tax laws do not contribute to fiscal stability.

A distinguished economist, Mr Amaresh Bagchi, who is no friend of fiscal concessions, has recently written apropos of one of the Shome panel recommendations: "Minimum Alternative Tax on book profit is bad enough. A tax on assets will be worse." Hopefully, Mr Sinha will not try to be too radical in tax reform.

Improving tax compliance has, however, to be of the utmost importance and must be assigned the highest priority. In this regard, Mr Sinha has to exploit the full potential of e-governance and the further use of computerisation in tax assessments and collection. The sooner and faster the revenue agencies progress in this regard, the more he can avoid resort to ham-handed reform of tax statutes.

Turning to expenditure, subsidies continue to be the Achilles' heel of the Budget. The Budget will reveal what Mr Sinha proposes to do on various subsidies. Each of the current subsidies has strong political claims to continuance.

Any attempt to reduce or remove subsidies will raise howls of protest. One hopes Mr Sinha has finalised measures to reduce the holding costs of foodgrains by allowing free release of stocks to trade for export and to States for food-for-work programmes.

It must be re-emphasised that the present system of procuring whatever foodgrains are offered at a pre-determined procurement price cannot in any way be sustained, especially when the sale price is also pre-fixed. There must be some alternative method of meeting the genuine needs of those below the poverty line without the Government holding stocks of this order.

The Government needs to consider how the US, which also has a programme of supplying cheap nutritious food to its poor, avoids incurring the costs of holding huge stocks.

There may be some merit in the US Food Stamps Programme, which has had a successful run of nearly two or three decades.

The practical problem in the introduction of such food stamps in India will have to be studied by an expert group, which can draw on the experience of the US as well as a few developing countries.

Overall, there are two silver linings in the cloud. The inflationary situation is relatively mild, and the external sector robust. Indeed, on the inflation front, the danger, as emphasised by the RBI in its latest Report on Currency and Finance, is of rather too rapid a decrease in the rate of inflation. The external sector is healthy, with nearly $50 billion in forex reserves.

Our external trade is, however, in deficit. Exports seem to be still the Cinderella of India's economy. They have taken a knock in recent months, partly due to the US recession. Mr Sinha will have to unveil effective measures both in respect of tax and other concessions to restore vibrancy to India's export sector.

No Budget can ever be fully popular unless it is full of giveaways, which Mr Sinha can ill afford. Any effort to do so will ultimately fail. For any Finance Minister, even at the best of times, the Budget exercise is a thankless one.

It is not given to him to tax and to please. Mr Sinha must expect his share of brickbats, likely to be more abundant than bouquets, in the constrained circumstances in which he has to frame his Budget for 2002-03.

Mr Sinha cannot hope to get an euphoric response for his latest offering. He can, however, draw consolation from the fact that the lower the initial expectations the more certain will it be that the Budget will have a lasting impact. Initial euphoria wears off. Lasting effects are more to be wished for. One hopes for pleasant tidings come Budget day.

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