The Hindu : National : Tightrope walk for Chidambaram

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Thursday, Feb 24, 2005

National

National

Tightrope walk for Chidambaram

By Ashok Dasgupta

NEW DELHI, FEB. 23. The economy is in a reasonably good health and in a stronger shape. The credit for this goes to the 6.9 per cent GDP growth achieved till date this fiscal on the back of a 8.5 per cent growth the previous year. And, this was possible, mainly owing to the double-digit growth rates witnessed in most segments of the manufacturing industry, the over 23 per cent increase in exports and the burgeoning foreign exchange reserves in an environment of low inflation, the lowest in recent times.

Yet, when the Finance Minister, P. Chidambaram, presents the Budget for 2005-06 — his second on behalf of the Congress-led United Progressive Alliance (UPA) Government — he may have to do a tightrope walk, particularly to meet and fund the various imperatives stipulated in the National Common Minimum Programme (NCMP), apart from the various demands of coalition politics.

For one, he will have to honour the commitments made in the NCMP to live up to the aspirations of the country's poor and the needy in both urban and rural areas, as also implement certain policy prescriptions emanating from the Prime Minister's Office (PMO) and the National Advisory Council, chaired by the Congress president, Sonia Gandhi.

More specifically, Mr. Chidambaram will have to launch further reforms in various sectors of the economy. This will require some fiscal incentives to give the much-needed push for further growth. This includes the infrastructure sector in its entirety, covering power, telecom, roads, ports and airports. Connected to this is the PMO programme of urban infrastructure development, covering about 60 cities in different States. A substantial allocation is to be made to launch the programme.

An increased allocation of Rs. 25,000 crores, against the existing Rs. 14,000 crores, has been sought for the employment guarantee scheme. To fund this, additional taxes are likely to be imposed on cigarette, pan masala and gutka. While no one is going to protest, except the respective industries, the mop-up may not be enough to fund the programme. Besides this, a separate fund has been suggested for public healthcare. The outlay for education is also sought to be raised from Rs. 5,000 crores to Rs. 8,000 crores.

It is evident, therefore, that apart from continuing the 2 per cent education on all taxes, another cess under some other social head is in the offing. Thus, while the programmes for outgo of funds are well laid out, the surprise remains in how the Finance Minister plans to finance them. And, here lies the test. For, all that he can afford to play with are the direct and indirect taxes and a drastic cut in allocation through well-targeted subsidies directly to the beneficiaries to plug the leakages.

In this scenario, it will come as a major surprise to many if Mr. Chidambaram chooses to fully implement the recommendations of the Kelkar Committee, which advocates lowering of tax rates while doing away with all the exemptions in direct taxes. At a time when the total revenue mop-up has not been up to the budgeted levels this fiscal, a lowering of tax rates may not necessarily lead to higher compliance, especially when the personal tax base is still quite low. While efforts are on to widen the base through computerisation of database, the move will pay off in a few years from now.

Minor tinkering

For the current fiscal, therefore, the general expectation is a minor tinkering with a similar tinkering in removing exemptions for the overall benefit of the lower tax slabs. At the higher tax slabs, the exemptions under Section 88 already stand waived. In effect, it will be a pleasant surprise if Mr. Chidambaram implements the Kelkar report in toto and a gamble if he does. The situation is much the same for corporate taxation as in lieu of the sops for certain sectors, there may be some tinkering with the depreciation rates to rake in higher revenue.

As for the stock market, traditionally the barometer of the nation's health and the investment window for foreign investors, any significant change may result in a major slump in the bourses and dash the country's hopes of being the leader among emerging markets.

That leaves the customs and excise duties. In customs, the revenue mop-up is expected to be higher following liberal imports at lower duties. This apart, oil imports at the prevailing high prices is also expected in windfall gains for the exchequer. However, on the excise front, the tinkering exercise may more or less be revenue neutral.

The milch cow thus may well be the services sector. While more lucrative sectors are sure to be added to the list, the levy would be applicable to all across the nation. In all probability, with diagnostic centres, pathological labs and ``luxury'' nursing homes and hospitals mushrooming all over the metros and major towns and cities to cater to the rich, this segment of services may help the Government rake in substantial revenue. And this is something that the Left parties will not oppose.

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