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Tuesday, Feb 26, 2002

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Tough agenda for Finance Minister

G. Srinivasan

IN THE run-up to Budget 2002-03 to be presented by the Finance Minister, Mr Yashwant Sinha, the ruling National Democratic Alliance (NDA), led by the BJP, seems to have suddenly woken up to fulfil a few of its Budget promises made last year. Thus, following the February 5 decision to disinvest from VSNL and IBP through strategic sales and reforms in the agriculture and pharma sectors by way of a new drug policy, the Cabinet also redeemed the 2001-02 Budget promise of effecting much-needed labour reforms with regard to the specific amendment that allowed industrial establishments employing less than 1,000 workers to lay off, retrench workers and close down units without government permission.

The Cabinet gave only in-principle approval to this piece of labour reform because of the division within itself about the political fallout of what might be perceived as an anti-labour policy. In any case, a Bill incorporating the exact stance of the ruling coalition on this is a prerequisite before it is brought to Parliament for the Opposition to support or oppose.

Be that as it may, the last-minute rushing of unfinished promises unmistakably reveal the Government's zeal to convince die-hard critics that it has the nerve and the political will to implement what it grandly proclaimed at the start of this fiscal. In any case, the economy, as it enters the Tenth Plan in a little over a month, is not in a wholesome fettle to ensure the indicative 8 per cent GDP growth as set out in the Approach Paper.

On the plus side, there are advantages such as the lowest inflation rate, high foreign exchange reserves upwards of $50 billion and a huge buffer stock of foodgrains (60 million tonnes) which could be put to productive use through prudent management strategies instead of being left to rot.

On the minus side, the signs on the economic landscape offer no hope or scope for complacency, particularly when the fiscal deficit is rising perilously, infrastructure impediments remain and State finances are in a parlous position. The Centre's budgetary position, given the steep shortfall in revenue collections and the poor receipts from the disinvestment of PSU equities of Rs 12,000 crore budgeted, is unlikely to reveal any distinct improvement in the revised estimates for this fiscal to be announced on February 28. This is despite netting resources of Rs 1,600 crore in January with a steep hike in excise duties on motor spirit and high-speed diesel.

Worrisome is that the revenue deficit is bound to be much higher in the revised estimates. The fiscal consolidation forecast in this year's Budget focussed on expenditure management, mainly through control of non-productive expenditure, continued thrust on tax reforms and larger mobilisation of non-debt capital receipts. It had projected all the major deficit indicators in terms of GDP at levels a shade lower than the revised estimates for 2000-01. With the country's reliance on direct and indirect taxes being what it is, small wonder that the low industrial production and the lamentably tepid import growth has led to greater shortfalls in revenue collections, though the authorities have dressed up the figures to show that because of exemptions, refunds and export promotion incentives the revenue buoyancy appears to have been hit.

It is not for nothing that fiscal experts such as Dr Raja J. Chelliah have said that even as the tax-GDP ratio had fallen, the ratio of income taxes rose slightly in 1989-90 to 1999-2000 and the ratio of Customs and excise duties fell markedly by about 2.7 percentage points. In the case of Customs, the fall is to be largely ascribed to the bringing down of the high import duty levels rather steeply as was needed under the economic reform programme.

For excise, the fall could be due to the extension of the input tax credit system to many industries and the granting of tax rebates on capital goods, without raising the final rates that were, in any case, high. In both cases, the fall in the ratio would have been less had the large number of exemptions been pruned. It is here that the Parthasarathy Shome Committee suggestion of removing the plethora of tax exemptions and benefits in the statute be scrapped deserves a try by Mr Sinha if he is to achieve the basic objective of even modestly pushing the tax to GDP ratio to sustain higher revenue flows to finance desirable developmental goals.

It is widely suggested that if such reforms as modernisation of tax administration, including computerisation and strong deterrent action against tax evaders and corrupt tax officials are undertaken, there is no need to dangle any distortionary tax benefits because compliance becomes voluntary. Considering how the layers of administration, starting from the municipal to the State to the Central level, affect an entrepreneur of a small- to medium-term manufacturing unit supplying goods across the States, it is time Mr Sinha did some sound homework to ensure that the tax net is not throttling entrepreneurs.

Instead of heavily relying on income and commodity taxes, the time has come to make a modest foray into taxing agricultural income though the farming sector continues to be viewed as a sacred cow and any burden imposed on it would imperil the economic growth. The present Government is not afflicted with any falsity of purpose while favouring market philosophy as it has decisively moved in this direction by removing restrictions on the movement and storage of foodgrains, sugar and edible oils. It is attempting to decontrol the sugar industry in the next fiscal and has floated a decentralised procurement system to cushion the burden of carrying costs of bloated stocks and is toying with the idea of leaving the minimum support price to be determined by the market than fixed on the cost of cultivation.

So, the Finance Minister has a chance to ruffle the sensitivities of vested interests by proposing a modest tax on agriculture or, alternatively, he might propose to hive off the various activities of Food Corporation of India (FCI). The constraints and restrictions on the entry of modern food procurement, transport, processing and distribution companies ought to be ended so that the benefits of modern management practices such as silo storage, logistics and large-scale processing could get a headstart. Food and fertiliser subsidies that gobble more than Rs 20,000 crore a year need to be rationalised so that the cost to the exchequer is minimised. Whether Mr Sinha will exhibit some gumption here is to be seen in the Budget.

As trade, industry and sectional interests have been working overtime to purvey several ideas that might constitute the nub of the next Budget, the crucial areas include infrastructure funding, reform of State finances, enhanced provision to Centrally-sponsored programmes such as Accelerated Irrigation Benefit Programme (AIPB), Accelerated Power Development Programme (APDP), urban infrastructure and a new development reform fund to help backward States undertake much-needed administrative reforms.

But considering the resource constraints plaguing the Centre and States and the constricted space for fiscal leeway, services taxes, that started with telecommunications, non-life insurance and stockbrokers in 1994 and gradually extended up to 40 in this year's Budget, should be extended. The suggestions of the Expert Group, headed by Mr Govinda Rao, might help the Finance Minister evolve a comprehensive coverage of services under the tax net with a well-defined negative list.

The 2002-03 Budget might chalk out a new path in decentralised governance with the States being subtly directed to take up the reformist path by conforming to parameters laid down by the Centre for the transfer of resources under extant or new programmes in infrastructure and social development. The Planning Commission is unobtrusively doing the groundwork in this regard. How far the Centre can sway the States will determine the feasibility of launching the Indian economy into a higher growth gear to significantly dent poverty and endemic unemployment.

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