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Budget: macroeconomic issues to fore

With buoyant tax revenues very few surprises are expected from the budget; fiscal profligacy an area of concern

— PHOTO: R. V. MOORTHY

WHAT'S IN STORE: A scene at Parliament House on Friday last. Details of Budget 2007 will unfold on February 28. This time, the Finance Minister is armed with sound economic data in preparing the proposals.

MACROECONOMIC issues will dominate the forthcoming budget for at least three reasons. The Finance Minister will have the comfort of basing his proposals on generally strong macroeconomic data. There are hardly any `crisis' areas although the resurgent inflation has become a major problem with overt political dimensions as well.

Second, no specific issues, relating to public finance or some other aspects of budget making, have been conspicuous in pre-budget discussions this time. On many occasions earlier, some central theme would guide the discourse.

One such was the fiscal agenda set by the Kelkar Committee which first submitted its report in 2003. Each year, some of its important recommendations would do the rounds before the budget.

A third and perhaps the most compelling premise to expect macroeconomic issues to dominate this time has to do with the ways the budget exercise has evolved and, equally important, been perceived by large sections of the community. Very few surprises are expected from the budget, which is viewed above all as the most significant economic announcement by the Government every year. While remaining a fiscal policy statement with the focus on tax proposals and expenditure details, the budget will cover practically all aspects of the macroeconomy.

The Finance Minister is on a strong wicket this year. Official CSO data have forecast a 9.2 per cent GDP growth this year on top of a 9 per cent increase last year. If the forecast comes true _ and there is no reason why it should not _ the economy will be seen to be growing strongly on top of an already large base. Such consistent performance has led many, including the Planning Commission, to target a 9 per cent average growth for the next five years.

Revenue buoyancy

An important consequence of the vigorous growth for the budget is the tax buoyancy. Government finances have been improving with each quarter during fiscal 2006-07. During the first nine months, tax collections increased by 37 per cent to Rs. 232,171 crore. Almost 71 per cent of the budgeted tax revenue was realised during that period as against less than 62 per cent last year.

Nearly all direct and indirect taxes have yielded more and the higher collection corroborates the growth trends. Corporate taxes have grown by more than 55 per cent reflecting the spectacular corporate profits during the year. Rising income levels have brought in more taxpayers. There has been a 27 per cent jump in income tax collections to Rs. 46,425 crore during the period.

Customs duty collections too have gone up by nearly 33 per cent to touch Rs. 63,655 crore on the back of a higher import bill (up by 28.7 per cent during the first three quarters). Customs duties have yielded more despite the reduction in peak duties on most items in the 2006-07 budget.

Service taxes too have gone up by 64 per cent. Despite being a relatively new levy, with extension of coverage every year, this tax is bound to yield even more in days to come. However, as with most other taxes, higher service tax collections have gone hand in hand with economic growth. The services sector already accounts for 55 per cent of the GDP and therefore holds immense potential.

The securities transaction tax (STT) introduced in 2004-05 has seen a sharp 90 per cent growth on a year-on-year basis.

This is another proof of a buoyant capital market and corroborates the view that some part of household savings is moving out of physical assets and into the newer stock market based financial instruments.

However, amidst all the buoyancy, excise duty collections have lagged behind, the rate of growth in the first nine months being under 6 per cent. Considering that the high economic growth rates of recent times were possible because of the good performance of manufacturing (and services), the less buoyant excise duty collections are a cause of worry and have invited strong measures to check evasion.

Missing fiscal rectitude

While non-tax revenues have registered meagre growth, it is the expenditure side that is causing worry. Altogether in the first nine months government expenditure has grown at a slower pace of 15.4 per cent but what is disconcerting is that it is plan expenditure that has been kept on a leash. Ministries dealing with agriculture and various types of infrastructure are laggards in utilising their plan allocations. Non-plan expenditure has gone up by nearly 14.42 per cent in the first nine months, which is twice the budgeted figure.

Interest payments account for a substantial portion of non-Plan expenditure. Interest rates are hardening and the Finance Minister will have to be especially concerned over unbridled expenditure.

Thus, amidst tax buoyancy, there have been the twin problems of fiscal profligacy in non-plan expenditure and low spending by key ministries.

How does all this affect the goals set under the FRBM Act? For this year the Government is committed to bring down the fiscal deficit to 3.8 per cent of the GDP, a task that may easily be accomplished on the back of the big jump in tax collections. That, at best, can only give some breathing time for the Government to tighten non-plan expenditure and comply with the fiscal responsibility legislation in letter and in spirit.

C. R. L. NARASIMHAN

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