Karo Yaa Na Karo:All Is Crime!

The Finance Minister had to present this year’s Budget in the background of slow global recovery, poor agricultural growth and increasing domestic prices. Although Indian economy is clearly on the path of recovery, complete withdrawal of the stimulus is premature, but excessive government borrowing could put pressure on interest rates and hurt the recovery process. Therefore, the fiscal consolidation process had to be initiated without completely withdrawing the stimulus. The Budget also had to increase allocation to various social sector programmes, infrastructure spending, and make higher transfers to states based on the recommendations of the Thirteenth Finance Commission, and yet compress fiscal and revenue deficits. It had to prepare the ground for the implementation of the direct taxes code and the goods and services tax (GST) as well, while dealing with pressures from various quarters for concessions.

There are questions as to whether the finance minister has overdone fiscal compression, whether the estimated deficit presented in the Budget is realistic and whether he will be able to contain the expenditures at the budgeted level. There is also uneasiness about inadequate allocation to infrastructure spending. Finally, there are usual lamentations on the undesirability of levying revenues from indirect taxes on equity grounds. Also, there are questions on whether more could have been done to prepare the country for GST. “Damned if you do, damned if you don’t”!

On fiscal consolidation, the revision in the GDP series has done some help to limit the fiscal deficit at the budgeted level as a ratio. However, in absolute terms, it has increased by over Rs 13,000 crore. What is of concern is that it is not merely due to the non-realisation of spectrum auction or shortfall in tax revenue by Rs 9,000 crore, but the non-plan revenue expenditure was higher by Rs 23,110 crore mainly due to higher outlay on subsidies (Rs 19,747 crore). Not surprisingly, the revenue deficit as a ratio of GDP had to be revised to 5.3 per cent from the budgeted 4.8 per cent, though fiscal deficit was contained broadly at the budgeted level, thanks mainly to the disinvestment proceeds.

It was widely expected that the 2010-11 Budget would initiate the process of fiscal consolidation and compress the fiscal deficit to 5.5 per cent of GDP as indicated in the medium-term fiscal plan (MTFP) last year. Indeed, some adjustment is painless; there is saving on account of pay and pension arrears and loan waiver amounting to Rs 35,000 crore. The proceeds from 3G spectrum auction is estimated at Rs 35,000 crore and from additional disinvestment at Rs 15,000 crore. Thus, the reduction of 1 per cent of GDP in the revenue deficit and 1.2 per cent in the fiscal deficit can be attributed to these factors. In a sense, the “stimulus” from the pay revision remains. The pay and allowances of Central government employees, which was 0.9 per cent of GDP in 2007-08, increased to 1.6 per cent in 2009-10 and is budgeted at 1.3 per cent in 2010-11.

Whether or not the budgeted fiscal and revenue deficits are realistic depends on two factors. First, oil subsidy is budgeted at just Rs 3,108 crore as against the last year’s revised estimate of Rs 14,954 crore cash subsidy and Rs 10,306 crore of securities. This assumes that either the international oil price will remain low or the government will pass on the price increases to consumers. Similarly, food and fertiliser subsidy outgo is budgeted to decline by about 0.3 per cent of GDP in 2010-11. Of course, the reforms envisaged in the Economic Survey on subsidies are the ways to go forward, but these can be implemented only in the medium term. The decision to make the subsidy nutrient-based without changing the administered price regime for urea is a halfway house. Increasing the administered price of urea only by 5 per cent would not contain the subsidy, nor will it promote balanced use of fertilisers, nor induce private investments in the industry.

The low level of infrastructure spending continues to be a matter for concern. In fact, a substantial part of fiscal corrections since the FRBM Act was implemented was by compressing capital expenditures. As a ratio of GDP, capital expenditure declined from almost 4 per cent in 2003-04 to 1.6 per cent in 2008-09 before marginally recovering to 1.9 per cent in 2009-10, and is budgeted at 2.2 per cent. Surely, the growth prospect of Indian economy depends on infrastructure spending, which is possible only when the unproductive component of revenue expenditures is reduced. In fact, in the seven important infrastructure sectors — namely, coal, mines, power, highways, shipping, urban development and railways — the budgetary support for plan has declined from 35.8 per cent in 2009-10 to 30.6 per cent and the rest is to be financed from internal and extra budgetary resources of public enterprises.

It is in preparing the ground for GST that the Budget is most disappointing. The only measure taken is to increase the general rate of CENVAT to 10 per cent. The finance minister is simply dismissive about extending the service tax to cover all services. Selective taxation of services is a distortion; it creates administrative problems and is fraught with litigation. What is even more disappointing is the attempt to make micro changes in the structure of customs and excise duties. In any tax policy, end-use exemptions will be misused and these have been extended in some cases. There is no attempt to unify the tax rate, convert specific levies into ad valorem, or remove the exemptions. On items like cement, the specific levy continues. Differentiation in the customs duty results in altering the effective rate of protection and ad hoc measures of the type taken are clearly undesirable.

There has been some commotion on the levy of service taxes on freight charges of railways. It must be noted that the value added tax on goods and services works well when all commodities and services are taxed. Manufacturers using the taxed services can credit the tax paid while paying the tax on their outputs and the claim that this will add to inflation is clearly ill founded. This perhaps underlines the need for educating the taxpayer or is it simply a political argument?

Source:Business Standard {M.G. Rao}