Financial Daily from THE HINDU group of publications
Wednesday, Feb 04, 2004
Unveiling an interesting future
INDIA'S combined opposition to the government constituted by the National Democratic Alliance thought that the presentation of the Interim Budget for 2004-05 was unconstitutional. They argued against the presentation.
But the Finance Minister, Mr Jaswant Singh, has fooled them all by presenting a nifty progress report on the government's fiscal management and its abridged `revenue vision' for the future.
The report and the vision are good for the constitution of the economy. What's more, there are not many major giveaways. The tax break on long-term capital gains has been extended by three years, but that may not qualify as a new giveaway.
The tax break on power projects has been extended, and that too may not qualify as a new giveaway. The stamp duty payable to the Central Government has been reduced up to 50 per cent.
Governments in the past may have regarded gross national gratification as an important interim goal whenever there was an opportunity to show that they cared for the citizens.
The unease that the combined Opposition expressed towards the presentation of the Interim Budget may have been in anticipation of numerous giveaways.
But there have been few giveaways in the Interim Budget for 2004-05 because of Mr Jaswant Singh's focus on gross national contentment. He has been credited with having made gross national contentment a major economic and social objective. The Interim Budget reinforces his focus.
The progress report is inspiring. There has been reasonable success in containing the fiscal and revenue deficits. Fiscal deficit is most likely to be 4.8 per cent below 5 per cent, to add emphasis of gross domestic product (GDP) for the period 2003-04.
The fiscal deficit was estimated at 5.6 per cent of GDP when the Union Budget for 2003-04 was presented. The revenue deficit is most likely to be 3.6 per cent below 3.75 per cent of GDP. The revenue deficit was estimated at 4.1 per cent. Well, the fall in the two deficit ratios deserves a round of applause.
The falling deficit ratios are the result of a small decline in expenditure (Rs 11,145 crore) and a very decent growth in GDP (7.5 to 8 per cent).
The decent growth in GDP has presumably pushed tax collections up. The rise in GDP deserves a louder round of applause.
There is nothing wrong in presenting good news. Events `such as' the Interim Budget provide the right opportunity to present good news, especially because we have yet to get to the stage of scrutinising the Economic Survey.
The peek into how the government would earn its revenues in the future is interesting and reassuring. It plans to earn more by making it possible for agriculture and the small and medium enterprises (SMEs) to grow and, thereby, make it possible for the services sector and the aggregate economy to grow.
The efforts aimed at enabling the growth of the farm and SME sectors have not been predicated on giveaways. The efforts are predicated on creating the infrastructure, environment and accessories that aid growth. This `revenue vision' deserves the loudest round of applause.
Fiscal consolidation has been restated as a serious objective. The only way in which a desirable contraction of fiscal and revenue deficit can be accomplished is by growing GDP at a rate higher than the growth in government expenditure.
Mr Jaswant Singh has signalled the Government's willingness to wait for GDP to grow. The Government is no longer too eager to front-load its spending and consumption.
The re-emphasis on engendering the second Green Revolution sets the right course for growing GDP. At the same time, the tax structure has been left unaltered.
This speaks loudly of the Government's intent to grow GDP than to merely secure funds for its spending and consumption or to gratify one or more constituencies.
But the second green revolution has not been flagged off through outlays. The revolution has been predicated on better credit flows, cheaper credit and income insurance.
Inflation and interest rates
Credit flows and interest rates traditionally belong to the monetary initiatives of the Reserve Bank of India, and it is heartening that tradition has been abandoned so as to highlight the importance of GDP growth. In the past, growth has been sacrificed in order to achieve price stability.
The Government may have begun to think that it is its duty not to sacrifice any growth opportunity. By attributing the smart growth of the economy to declining interest rates, the Finance Minister has probably stated his Government's belief that low interest rates are good for the economy.
They may have spurred consumption and made the economy-wide cost of capital more affordable at a time when the economy has shown signs of robustness and resolve to grow. If low interest rates have contributed to growth, the Government has implicitly committed itself to keeping interest rates low.
Mr Jaswant Singh has reminded us that inflation has been happily low and that he does not expect the inflation rate to exceed 4.5 per cent.
The intent to pay attention to interest rates and inflation shows that the Government is ready to do what is necessary to keep the growth engines rolling.
If the growth engines agriculture, SMEs and services were kept rolling, the twin objectives of boosting employment and poverty eradication would be served.
The challenge lies in managing the yield curve well and in keeping inflation at low levels. Without fiscal consolidation, these would be daunting.
But, fortunately, the Government expects the surge in employment to take place in the unorganised sector.
The unorganised sector has a deep, untapped resilience that may play a critical role in serving the multiple objectives.
More than the amount of taxes paid, most people find the activities related to paying taxes and filing returns forbidding.
The emphasis on simplifying or making unnecessary the contact with the tax authorities is apt in the context of allowing people to pay taxes without pain.
Mr Jaswant Singh has promised to simplify service tax procedures. Single return and registration for service taxpayers may become effective. Electronic filing of excise returns will be possible from June 30, 2004.
These electronic efforts are apt at a time when services will become the major source of taxes and GDP.
The Finance Minister has paid attention to the operational issue of collecting taxes most efficiently and making it possible for taxpayers to pay taxes with a smile. Will there be more smiles in three months?
(The author is a financial analyst. Feedback may be sent to email@example.com)
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