The Hindu : STRETCHING THE NORMS

Online edition of India's National Newspaper
Wednesday, Feb 04, 2004

Opinion

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STRETCHING THE NORMS

BY THE STANDARDS of the past month, during which Union Finance Minister Jaswant Singh stretched fiscal as well as political norms by announcing innumerable tax concessions and spending programmes, the interim budget for 2004-05 appears to be a modest package of a small number of new initiatives. Appearances can, however, be deceptive. The tax and spending measures that the Finance Minister has proposed make up an interim budget that ends up as much more than a proposal for a vote-on-account that would enable a caretaker government to meet its financial responsibilities after March 31. Many of Mr. Jaswant Singh's measures carry a clear election flavour. Foremost among these is the decision to merge the dearness allowance and basic pay of Central Government employees. This will add Rs.3,500 crores to the Government's annual expenditure and have a cascading impact on State Government finances. Coming within a few years of the Fifth Pay Commission fiasco, this flies in the face of the NDA Government's professed commitment to fiscal prudence and responsibility.

It cannot be anybody's case that all the new proposals will have a negative economic impact. The Antyodaya Anna Yojana has proved its effectiveness as an instrument for improving nutrition among the poorest of the poor, so its expansion is a positive step. The new drinking water programme for metros is also welcome. Similarly, there is much to be said for the new steps to improve tax administration. The problem with the interim budget, which but for its silence on direct taxes is as good as a full-fledged budget, is that it has innumerable proposals that can and will be used by the ruling coalition during the election campaign. Thus, the measures to expand farm insurance, rural credit and the special package for sugar will be dangled before rural voters. The extension of the capital gains exemption scheme for investment in equities will be held up before the investing class. Further, the right place for a promise to revisit the standard deduction and exemption limits on personal income tax is an election manifesto — not the interim budget of a government that has decided on an early election.

The Government will claim a considerable achievement in carrying out a large swap programme that would lighten somewhat the debt burden on the State Governments. But the impressive figures on the fiscal and revenue deficits in 2003-04 hide as much as they reveal. First, the better than expected economic performance of the current year certainly has contributed to lower deficit-GDP ratios. Secondly, while the revised estimates of the absolute size of the deficits are smaller than projected last year, these reflect mixed trends and one-off achievements. Tax revenue is higher than expected. However, while improved profitability has brought in an extra Rs.11,000 crores of corporation tax, excise revenue and income tax receipts are lower by Rs.4,000 crores each. One reason why non-tax revenue has surpassed expectations is the one-off income from telecom licence fees. On the expenditure side, subsidies are Rs.5,000 crores lower than anticipated mainly because drought relief and exports have brought down food stocks. With the creation of a new non-lapsable fund for defence, this will be the last time that a shortfall in spending in this sector will contribute to smaller deficits. And while the Government claims that it is expanding the productive base of the economy, it should be pointed out that 2003-04 will end with Plan capital spending marginally less than budgeted.

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