The Hindu Business Line : Prosperity in sight, but miles to go

THE Finance Minister ended his Interim Budget speech with a self-congratulatory pat. He recited all the positives that have taken place under the watch of this Government. Much of his satisfaction is well earned. In contrast to the placidity of the first half of the 1990s, the last five years have been tumultuous internally and externally. India has emerged stronger and with a newfound sense of confidence. However, sustaining it is a challenge and crucial since the journey to lasting and widespread economic prosperity has just begun. The road ahead is long and winding.

However, the Interim Budget was anti-climatic given the speculation in the media about new initiatives. There were rumours that income tax exemption limits for salary earners would be raised. In the end, no such specific measures were announced. It is just as well because the Government had gone on an announcement spree since the New Year. Such a breathless pace contains an inherent danger of the measures being ill-conceived and giving rise to systemic risk later.

The highlight of the interim budget was the reduction in the fiscal deficit for the current financial year to 4.8 per cent from the original budget estimate of 5.6 per cent and the government now anticipates the fiscal deficit in the next financial year to be 4.4 per cent of GDP. It is a big improvement. Bulk of the improvement, of course, has come from unexpectedly large capital receipts from States on account of the Debt Swap scheme. The initial estimate of capital receipts of Rs 18,000 crore has been revised up to Rs 64,600 crore.

As the country aims to grow higher, an urgent reorientation of the fiscal expenditure is necessary. What is required is a qualitative improvement in the deficit rather than a quantitative reduction. Interest payments, defence and subsidies continue to account for three-fourths of the revenue expenditure both in the revised estimates for the current fiscal and for the next fiscal year. Politically courageous decisions must be taken in these areas to enable the government to spend on hard (roads, port, power and aviation) and soft infrastructure (health and primary education) areas. Otherwise, growth would run into constraints as it is happening in China creating needless inflation pressures.

Obviously, the decision of the Government to merge dearness allowance to the extent of 50 per cent of the pay, citing the Fifth Pay Commission recommendations, is not an example of such political courage. The Fifth Pay Commission made many worthwhile recommendations towards streamlining government work force. The previous United Front Government did not implement them nor has the present government attempted them.

The stated intention to re-examine income-tax exemption limits is welcome as it is long overdue. A reformist Finance Minister took the bold decision in 1997 to lower tax rates and the exemption limits were then set. They have not been revised since. It is an anomaly and it undercuts the objective of bringing more citizens into the tax net. Millions of self-employed professionals — lawyers, accountants and doctors — would find the benefit-cost ratio of paying taxes higher than avoiding taxes if the exemption limits are set reasonably high at around Rs 6-9 lakh per annum. Most of them would come into the tax net voluntarily. Their productivity would improve, as their ingenuity would be used to serve clients and not expended in finding ways to avoid the tax net for themselves.

Unfortunately, the clarity shown on this aspect of the direct tax is missing in the clarification issued on the taxation of the BPO sector. The clarification that there shall be no tax on the foreign company if the outsourced services were ancillary and auxiliary in nature and if adequate remuneration was paid to the Indian call centre still leaves considerable scope for litigation and disputes. The Government should resist the temptation. Economic activity and national income are higher with the boom in the BPO sector and hence there is an improvement in tax collection too. The Government should remove the residual ambiguity soon.

The reduction in stamp duty by 50 per cent on all Central Government stamp papers and the intention to raise the threshold for stamp duty from Rs 500 to Rs 50,000 are likely to significantly reduce the cost of undertaking transactions and hence facilitate more of them. The path of higher economic productivity lies in more such measures. While economic liberalisation is often criticised as being directed to the foreign investor, de-bureaucratisation and de-regulation would benefit ordinary Indians more. If the Government steps out of the way of legitimate economic activity, productivity and growth rates would improve. Feeling good can be a permanent feeling.

As a footnote to this comment on the Budget, I must mention about the RBI report on the foreign exchange reserves that the Finance Minister referred to early in his speech. The report mentions that the RBI holds 4.3 per cent of its reserves in gold. One does not know if this is in line with international practice or below that. Purely from the point of view of the pressures building up on the US dollar that are likely to spill over to other currencies, there is a case for increasing the share of gold in the forex reserves.

(The author is Director, Global Economics and Asset Allocation in Credit Suisse, Singapore. The views are personal. Feedback may be sent to nageswar@singnet.com.sg)