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Friday, Jul 09, 2004

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A WORTHY FIRST ATTEMPT

THE UNITED PROGRESSIVE Alliance Government can be commended for producing a budget that is, by and large, faithful to the spirit of the National Common Minimum Programme, provides for a huge increase in Plan outlays, ushers in major initiatives in agriculture, contains only a modest measure of fresh taxation, and yet ends up as a model of fiscal rectitude. Under the circumstances — Union Finance Minister P. Chidambaram and his team had barely six weeks to come up with a new fiscal thrust — the expenditure and revenue proposals are the best that could have been prepared. The package in the Union budget of 2004-05 may be relatively modest in its ambitions but it is also optimistic in its assumptions on revenue. The budget edifice is built on a forecast of a 24.6 per cent increase in gross tax revenue. Such buoyancy has not been achieved even once in the past decade. So if there is a large shortfall in receipts, Mr. Chidambaram's first budget in his second stint will collapse. The casualty then will be either implementation of the NCMP or an inability to achieve the promised 1.1 percentage point reduction in the revenue deficit.

There are no surprises in the expenditure priorities of budget 2004. The core initiatives are, of course, in agriculture and irrigation. While fresh measures have been announced for both the industry and service sectors, there is no mistaking the sectoral emphasis. The multi-pronged strategy of the New Deal for agriculture, comprising additional public spending, tax incentives for agro-processing, and off-budget measures to promote rural infrastructure, should be appreciated for the priority that is being accorded to a sector that is still the source of livelihood for 58 per cent of India's working population. In water, which has emerged as a critical livelihood issue, the programme for a phased clean-up and restoration of the one million human-made water bodies is noteworthy, so also the new nation-wide rainwater harvesting scheme for villages. The cess of 2 per cent on all taxes will help finance efforts to take India closer to universalising elementary education but that apart, there is not much in Mr. Chidambaram's package that addresses longstanding concerns in the social sector. True, funding for rural housing will go up by more than 30 per cent this year. However, the promised push to rural employment programmes is not to be seen in the budget. The Finance Minister has announced that a bill to enact the promised National Employment Guarantee Act is being drafted. In the meanwhile, a food-for-work programme in the 150 most backward districts will be implemented. Allocations in 2004-05 for the Department of Rural Development are, however, budgeted to come down by 27 per cent. Last year was unusual in that the drought saw the Centre and States carry out major relief operations. Yet if the Rs.4,888-crore special provision in 2003-04 on this account is excluded, the financial support for rural development this year still shows only a disappointing growth of six per cent. All said and done, there is no mistaking the substantial rise (19.6 per cent) in total Plan outlay, with both revenue and capital spending slated for a large step-up and Central Government assistance for the State Plans expected to increase by 18.5 per cent.

Contrary to the groundless fears of the UPA Government unveiling a host of new and higher taxes, what budget 2004 does contain is a very small number of new revenue measures. There is the education cess, the 2 percentage point increase in the service tax, and the new turnover tax on trades in the bourses. Together the net additional revenue expected in a full year is only Rs.6,000 crores to Rs.7,000 crores. Where then is the rest of the Rs.62,810-crore increase in tax receipts (a net increase of 21.9 per cent) to come from? A natural growth accompanying a projected 12 per cent expansion of GDP is one obvious source. However, considering that gross tax receipts in 2003-04 (when the economy expanded by more than 12 per cent) increased by less than 18 per cent, it will be a daunting task for the Finance Minister to meet his targets. There is, of course, the fine print. Mr. Chidambaram said in his speech that he hopes to fetch "a tidy sum" from arrears in all taxes. On this very uncertain source of revenue — which is tied up in departmental disputes and litigation — does much of the budget depend.

There is a larger problem with the approach to taxes. In an anxiety to please, Mr. Chidambaram has taken the popular step of exempting those with a taxable annual income of Rs.1 lakh from paying tax. This means that the ratio of minimum taxable income to per capita GDP has been raised from 2.5:1 to 5:1. In the process, 1.4 crore out of 3.4 crore assessees will no longer pay income tax. While the revenue collected from this category of taxpayers may have been a small amount, there will be worries on what signal this sends out on contribution to government revenue. There is a problem as well with the many changes in excise duty. The Finance Minister has bemoaned the sluggish growth in excise and has harped on the need to move to a regime of a single CENVAT rate. Yet he has offered sweeping exemptions and made arbitrary cuts in duties. These proposals go against the spirit of limiting zero rate products to the most essential and maintaining a very narrow spread of rates around CENVAT. Budget 2004 has further reversed the process of cleaning up the excise duty regime. However, there is one tax package that should be appreciated. Efforts over the past couple of years to cast the excise net wider in the textile sector have only caused hardships to the small-scale producers, without making any incremental contribution to government revenue. The proposals in the UPA Government's first budget, abolishing mandatory CENVAT and giving the handloom and powerloom weavers the option of either not paying excise or taking tax credit for payments, should be an experiment that is given time to succeed. The decision to raise the FDI caps substantially in three critical industries — telecom, insurance and civil aviation — can be seen as a return to the first edition of Chidambaram; it is a controversial decision that has already divided the alliance.

The shortcomings of the Union budget for 2004-05 should not take away much from its larger positive content and approach. It seeks to sustain the overall momentum in growth, correct sectoral imbalances, and take the first hesitant steps in dealing with livelihood issues. The framers of the budget had little time to put together their proposals and the many arms of the Central Government will have only a little more than six months after Parliamentary approval to make it work. The Planning Commission is expected over the course of the year to review, streamline and develop new schemes for rural development and anti-poverty programmes. Mr. Chidambaram has promised a more comprehensive budget next year, based on inputs from the Planning Commission. Budget 2004 must be seen therefore as a sincere and worthy first attempt to implement the NCMP agenda.

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