The Hindu Business Line : Budget 2004-05: A macro-economic preview

The major constraint that the Finance Minister may face in revising the figures presented by his predecessor and meeting the demands of his coalition colleagues will be on the revenue side, says V. K. Srinivasan, taking a look at the procedur al and philosophical issues that will shape the Budget.

WITH the Finance Minister, Mr P. Chidambaram, indicating that the Union Budget for 2004-05 will be presented on July 8 and that the Government in now "in Budget mode," the popular expectation is that the change of guard on Raisina Hill will bring about a shift in the direction and contents of the Budget.

Resuming the earlier practice of consultations with different stakeholders in the economy and experts, the Finance Minister appears to be keen on transferring the Common Minimum Programme into an operational frame.

The state of the economy inherited by the UPA government has, as recognised by the Finance Minister, an element of resilience with regard to growth, jobs and income, though electoral polemics had earlier involved claims of unprecedented growth by NDA partners and a vigorous countering of this by Congress(I) members.

The hiccup in the stock market was a distraction though the real economy appears to hold promise of the last year's growth rate being sustained. There are two major factors, one procedural and the other philosophical, that the Finance Minister may consider to shape and lend substance to the Budget.

Interim Budget

The first procedural factor flows from the Interim Budget presented by the former Finance Minister, Mr Jaswant Singh, on February 3, before the nation went to the polls in April.

Mr Jaswant Singh had sought only a vote-on-account to cover the essential expenditure of the government for the first four months of FY 2004-2005, and this imposes time constraints on the need to complete the budgetary formalities before the end of July.

The consultation process to obtain political consensus may be affected by time constraints but as the experience and expertise of the Finance Minister is well acknowledged, the issue should be manageable.

More significantly, while seeking a vote on account for expenditure for part of the year, Mr Jaswant Singh had presented the demands and grants and the annual statement for the entire year, submitting estimates of total expenditure of Rs 457,434 crore, of which Rs 135,071 crore was for Plan expenditure and Rs 322, 363 crore for non-Plan expenditure.

The total revenue receipts projected were Rs 290,882 crore, comprising net tax revenue of Rs 220,132 crore and non-tax revenue of Rs 70,750 crore.

Capital receipts, placed at Rs 166,552 crore, included borrowings and other liabilities to the tune of Rs 136,452 crore, with loan recovery of Rs 14,000 crore and disinvestments receipts of Rs 16,000 crore contributing the rest. Both Revenue and Gross Fiscal Deficits were placed at uncomfortable highs of Rs 89,860 crore and Rs 136,452 crore.

For one thing, the new Finance Minister will not be handicapped by the fact that Mr Jaswant Singh had presented the Demands for Grants and Financial Statement for the entire year since the latter had qualified his presentation with the statement that the estimates "could be revised, as is normal, at the time of presentation of the normal Budget."

Revenue constraints

The major constraint that Mr Chidambaram may face in revising the figures presented earlier and meeting the demands of his coalition colleagues will be on the revenue side. Mr Jaswant Singh had projected total revenue receipts for 2004-2005 at Rs 290,882 crore which implied an increase of Rs 36,947 crore over 2003-2004 Budget estimates and Rs 27,855 crore over 2003-2004 revised estimates.

One would consider this a trifle too optimistic since the experiences of 2000-01, 2001-02 and 2002-03 reveal that actual realisation of tax revenue was much lower than the Budget and Revised estimates.

In 2000-01, the actual revenue receipts of Rs 192,624 crore fell short of the Budget estimates by Rs 11,049 crore and of revised estimates by Rs 14,542 crore.

In 2001-2002, the actual realisation of Rs 201,449 crore was lower than the Budget estimate by Rs 30,926 crore and than the revised estimate by Rs 11,123 crore.

In 2002-2003 the experience was no different as the actuals of Rs 231,748 crore were lower than the Budget estimates by Rs 14,357 crore and revised estimates by Rs 5,188 crore.

The experience of 2003-2004 was slightly different, with the revised estimates of Total revenue receipts placed at Rs 263,027 crore, higher than the Budget estimates by Rs 10,908 crore, with net tax revenue increasing by Rs 3370 crore and non-tax revenue increasing by Rs 5,722 crore and disinvestments receipts also showing an increase.

The CAG figures for 2003-2004 appear to indicate that total receipts were higher than the budgeted and that expenditure management had helped in reducing the gross fiscal deficit to Rs 125,960 crore, against the budgeted deficit of Rs 153, 637 crore. However, the net tax revenue to the Centre seems to be lower than the Budget estimate.

sThis trend is ominous considering that the Twelfth Finance Commission's recommendations are due; all States have pitched up their demands and some are getting ready for polls.

Tax reforms

The Finance Minister had in his earlier stint lowered the tax rate with the expectation that there would be better compliance. The reports of the two Task Forces headed by Mr Vijay Kelkar appeared to pursue this approach.

However, an analysis of the tax reform in the macro perspective of the Budget suggests the need for circumspection in lowering the tax rates. It is better to maintain some degree of stability in the tax rates.

The hard reality of the Indian fiscal scene is that the tax-GDP ratio has fallen from 9.9 per cent in the 1980s to 9.7 per cent in the first half of the 1990s and to 9 per cent in the second half of the 1990s.

The relative contribution of direct and indirect taxes has changed, with a higher share of direct taxes. There is some relief from the widening of the tax base by the introduction of the six economic criteria for submission of returns.

Between 1990-1991 and 1999-2000 the IT returns increased from Rs 35.25 lakh to Rs 142.42 lakh, and the income return from Rs 15,489 crore to Rs 125,659 crore. Even this increase is not reflected in the tax payable, from Rs 2,817 crore to Rs 10,376 crore, in the same period.

There is a view that improvement in direct tax resulted not so much in better tax compliance following the lower marginal rates but by the implementation of the Fifth Pay Commission recommendations and revision of public sector wages, increasing a number of those covered by procedures of Tax Deducted at Source (TDS). Perhaps the Finance Minister will continue the expansion of the tax base by extension of the criteria to all urban centres and major village panchayats.

Common Minimum Programme

The philosophical framework for Budget 2004-2005 will be provided by the Common Minimum Programme, to which 14 political parties have subscribed. But the 6,700-word and 24-page political document is liberal with its commitments and declared intentions, and highly economical in regard to the time-frame for implementation and mobilisation of resources required for financing and completing the programmes to be formulated to keep the promised of the CMP.

The CMP's major thrust in the areas of health and education have to be handled mostly by the State governments but the demand for Central assistance may increase, as also for employment generation schemes.

Expenditure management

The Finance Minister may face pressure from his colleagues by way of high demand for funds. He may need to show patience in handling the complexities of coalition politics.

Steps taken for management of expenditure appear to be yielding some results at the margin, but one must note that broad budgetary heads have remained static in relation to the size of the national economy during the last decade. As against revenue receipts fluctuating within a range of 9 to 10 per cent of GDP, total expenditure remained at 16 per cent of GDP with non-Plan expenditure remaining between 11.1 per cent and 12.1 per cent.

Fiscal deficit has been fluctuating but revenue deficit has been creeping upwards. There is a degree of rigidity in expenditure commitments of the Government, with interest payments, Defence and salary bills taking a large chunk away.

The Finance Minister may also face a dilemma in regard to reduction in Central subsidies which, in practice, have doubled from Rs 12,253 crore in 1991-1992 to Rs 24,487 crore in 1999-2000 and further jumped to Rs 49,907 crore as per the Budget Estimates 2003-2004.

The point to note is that while export promotion subsidies have tapered, food subsidy has increased from Rs 2,850 crore in 1991-1992 to Rs 27,800 crore in 2003-2004 and a new element of subsidy on petroleum products accounted for Rs 6,265 crore in 2002-2003 and Rs 8,116 crore in 2003-2004.

With the fluctuations in the global oil market and the dismantling of the administered price mechanism, there is bound to be an increase in this item. The adverse impact of global oil prices on the prices for feedstock for fertilisers and further effect on fertiliser prices may need to be handled carefully.

States' requirements

The report of the Twelfth Finance Commission is due. The quantum of Central transfers to the States in terms of Finance Commission recommendations increased steeply in the 1990s. As against the recommendations of the Eighth Finance Commission for the transfer of Rs 39,452 crore during 1984-1989, the Ninth Finance Commission recommended the transfer of Rs 100,036 crore for 1990-1995, the Tenth Finance Commission recommended Rs 226,643 crore for 1995-2000 and the Eleventh Finance Commission Rs 434,905 crore for 2000-2005.

Will the Twelfth Finance Commission maintain the incremental approach? This apart, the Tenth Five Year Plan approved by the National Development Council indicates an outlay of Rs 560,615 crore for the plans of all the States, with Central assistance of Rs 253,844 crore over a five-year period 2002-2007.

Increasing fiscal and Plan transfers from the Centre to the States may pose problems for the Finance Minister in earmarking funds for Budget support to the plans of Central ministries apart from meeting non-Plan requirements.

Greater coordination between the Finance Commission and the Planning Commission may provide some relief to the Centre and result in better fiscal management by the State Governments. This area may need the combined efforts of the Finance Minister and the Prime Minister.

(The author is Director, Indian Institute of Economics , Hyderabad.)