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Wednesday, Feb 18, 2004

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Interim Budget: An economist's delight, too

T. C. A. Ramanujam

"The country's macro economic situation is better than it has ever been in the last fifty years."

the Finance Minister, Mr Jaswant Singh

AT THE entrance to the Finance Minister's room in the North Block there is this warning: "Men at work. Economists keep away." The Budgets that Mr Jaswant Singh presented, both last year's full-fledged one, and this year's interim, however, make a lot of sense even from the point of view of the orthodox economists.

The Vote on Account was deliberately converted into an Interim Budget with the specific object of conveying to the nation the broad economic outline visualised by Mr Jaswant Singh for the year ahead. He has coined the new phrase "gross national contentment" in the place of gross national product. And what has he done to promote this objective:

  • Lowering the rate of interest for agricultural credit so that the rural sector gets money almost on part with the manufacturing sector.

  • Issue of Kisan Credit Card by March 31, 2004.

  • Extension of farm income insurance scheme to 100 districts.

  • Extension of Antyodaya Anna Yojana to cover 2 crore BPL families before April 1, 2004.

  • The accelerated drinking water scheme for metro areas.

  • Stamp duty reduction by 50 per cent.

  • Upgrading of one medical college in each of the six states of Andhra Pradesh, Jammu and Kashmir, Jarkhand, Tamil Nadu and West Bengal to the level of New Delhi's AIIMS under the Pradhan Mantri Swasthya Suraksha Yojana.

  • Permission to individuals to remit up to $25,000 yearly to make foreign investments.

    Mr Jaswant Singh has announced so many other measures to remove friction with bureaucracy like free baggage allowance up to Rs 25,000, deemed export status for items exempt from countervailing duties to help the capital goods market in India etc. There is no throw away of government revenues even while the tax laws are getting more and more simplified and fiscal concessions like the one for capital gains tax on equity are extended.

    Fiscal deficit

    Year in and year out, it was being dinned into our ears that the economy would be made or marred by poor fiscal deficit target. All those World Bank economists and our own financial pundits were simply stunned when the Finance Minister announced that the target in this regard has not merely been kept up but the fiscal deficit will stand at 4.8 per cent.

    No doubt, the total expenditure itself has been brought down. It stands at 14.75 per cent of GDP (an all time low) and it was 17.23 per cent last year. Still, Central Plan outlay has gone up. The Minister hopes to wipe out the revenue deficit by 2005-06, two years head of the Fiscal Responsibility and Management Act schedule.

    One sore point can be that investment has not picked up and Plan expenditure on capital account is on the decline. Subsidies have been brought down for both food and fertilisers and the saving is about Rs 5,200 crore. For the first time in the post- reforms period has the target for disinvestment proceeds been exceeded. The receipts will be over Rs 14,500 crore when ONGC shares are put on the block.

    The expenditure management is such that there cannot be much criticism in an era when the private sector is being encouraged to do its best by way of investments.

    Tax policy

    The principal object of any tax policy must be to raise revenue. Between 1998-99 & 2003-04, there have been additional resource mobilisation efforts for Rs 29,532 crores. The peak was in 2002-03 when Mr Yashwant Sinha saddled us with a tax burden of Rs 10,500 crore.

    Mr Jaswant Singh has not raised additional taxes and by revitalizing and rationalising the administrative machinery, he expects there will be no decline in tax revenues. The direct tax revenues will exceed Rs 1,00,000 crore and the estimates for 2004-05 put the same at Rs 1,25,847 crore, of which corporate tax will be Rs 79,546 crore representing a healthy 63.2 per cent of the direct tax effort.

    Excise duties go up to Rs 1,07,000 crore reflecting the healthy growth of the economy. Total tax revenues (both direct and indirect) have been going up from Rs 2,31,748 crore in 2002-03 to Rs 2,63,027 crore in 2003-04 and an estimated figure of Rs 2,90,882 crore in 2004-05.

    The revenue buoyancy has encouraged the Government to announce the largesse to its staff by way of merger of half the DA with basic pay, resulting in additional burden of over Rs 15, 000 crore in a full year. It is no doubt true that the tax-GDP ratio is not improving by international standards but it is also true that the ratio is not on a decline.

    Apart from long-term capital gains and dividend tax, the Minister has not shown inclination to fritter away revenues by way of fiscal incentives. In particular, he has resisted the temptation to extend the sunset clauses in the Tax Code relating to export houses.

    Fiscal incentives have a limited role in the promotion of exports. Only recently, did the PAC (Public Accounts Committee) point out that Rs 19, 400 crore in foreign exchange remained unrealised till June 2003. It has pointed out that over the last five years, as much as Rs 71, 030 crore has been gone to provide special export related concessions.

    The PAC has highlighted the fact that about 60 per cent of the duty benefits and 50 per cent of outstanding foreign exchange related only to about 20 firms, clearly pointing to abuse of the system.

    Export-related frauds, including over-invoicing, fictitious exports and irregular availment of incentives, have diluted the case for export incentives and the Minister has done the right thing by not acceding to the repeated demands for extension of such incentive provisions.

    A Lucky FM?

    No one need conclude that every thing is hunky-dory with the policies. Employment generation has been the Achilles' heel of post-reforms Budgets. The rural-urban divide continues to widen.

    Several important steps heralding the second generation reforms are not complete.

    The Monopolies Commission is gone. But the Competition Commission is yet to be constituted. SICA stands repealed, but the BIFR is yet to give way to the National Company Law Tribunal.

    The Constitution of the National Tax Tribunal to help expeditious settlement of tax disputes remains at the ordinance stage, the Bill not having been passed into law.

    But, then, as a leading critic pointed out (in The Hindu), a growing economy, low inflation, increasing consumer choice, a rising stock market, no major scams, no major drought or floods, no external tensions, an enhanced international profile — all this contributed to the feel good factor.

    What criticism can be hurled at the polices of Mr Jaswant Singh? A former Finance Minister attributes Mr Jaswant Singh's success to luck. Napoleon Bonaparte was told about a general who was brilliant in military tactics. Napoleon retorted: "He may be brilliant; but is he lucky?"

    Mr Jaswant Singh is both brilliant and lucky.

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