The Hindu Business Line : Budget: Best under the circumstances

THE Central Budget for 2004-05 has belied all the great expectations raised by the fact that both the Prime Minister, Dr Manmohan Singh, and the Finance Minister, Mr P. Chidambaram, are experts in economic management and were associated with the era of reforms initiated in the early 1990s. Drastic or fundamental changes were expected in the approach to fiscal management and economic reforms.

In the end, it has turned out to be a run-of-the-mill document that conveys a feeling of déjà vu to the public as well as to students of public finance. A plethora of schemes, the setting up of committees or commissions, some concessions in the tax regime, etc., are the stuff of which the Indian Budgets are made, and the latest one is no exception.

The most important aspect for the common man is, of course, the structure of income taxation. As widely expected, the exemption limit has been raised to Rs 1 lakh but the slabs remain. The slabs were not announced. One presumes that it would be Rs 1 lakh-Rs 1.5 lakh and above Rs 1.5 lakh with the applicable rates being 20 per cent and 30 per cent respectively.

The Finance Minister said that 3.4 crore persons had filed income-tax returns of whom 2.7 crore paid taxes. As a result of the increase in exemption limit, 1.4 crore assessees will get relief and go out of the tax net. (Tax net is the right technical word, not tax base, which refers to the basis of taxation, viz., income, wealth, etc.) Thus, effectively only 1.3 crore assessees remain with just two slabs.

Given the skewed nature of incomes in the country, a small proportion of them will be paying a large percentage of the tax collected. The Finance Minister could have gone one step further and introduced the Flat Tax with a common rate for all assessees.

This rate could have been so fixed as to be revenue neutral with any rise in collection coming from the growth of the Gross Domestic Product. The Kelkar Group did examine the proposal but rejected it for reasons not convincing.

Second, the rise in the exemption limit could have been attempted with the abolition of a number of exemptions, such as those under Sections 80 and 88 relating to interest income and investment in selected instruments. These exemptions are availed of by the richer segments of society and, hence, their abolition along with raising the exemption limit would not have affected a large majority of the voters.

There is enough statistical evidence to show that savings in the country are influenced by incomes and not by the rate of interest. The latter has a bearing only on the directions of investment.

This is substantiated by the rise in savings ratio and the substantial collections under many savings schemes of Government despite the steep reduction in interest rates in the recent years.

However, the Government appears to be still guided by the obsolete notion that any withdrawal of the exemptions mentioned above would affect savings.

There is an announcement that Senior Citizens would have a new Savings Scheme with a return of 9 per cent per annum and that the Varishtha Pension Bima Yojana would be withdrawn. Details were not revealed. One does not know whether it would be an improvement over the lapsed scheme.

If it has no ceiling on the investment or the limit is higher than the one fixed earlier it would be a welcome substitute. Otherwise it would only mean further administrative work in developing the new one. One hopes that those who have already subscribed to the existing scheme will continue to have it or given an option to switch to the new one.

The Finance Minister was silent on the implementation of tax reforms like crediting refunds to bank accounts through the Electronic Clearing Service announced in the last year's Budget. A number of other documents were submitted to Parliament along with the Budget.

Perhaps, they throw some light on the matter. But the basic problem of getting refunds without delay remains. One hopes that with the relief afforded to 1.4 crore assessees the workload on the tax officers would come down and they would be able to deal with refunds expeditiously.

The abolition of the long-terms capital gains tax and the lowering of the rate on short-term gains to 10 per cent should have given a boost to the stock market. On the other hand, after rising above 5000, the Sensex fell below that level, obviously due to the turnover tax of 0.15 per cent.

The withdrawal of exemption of interest from income-tax extended so far to NRIs is sensible in the light of attempts to close arbitrage opportunities for them, creating a problem of capital inflows and their sterilisation by the central bank.

One does not know whether it will apply to NRI deposits in offshore banking centres. The wide-ranging concessions in excise and Customs would be welcome to many sectors.

Eventually, the question remains as to how the country will grow at the desired rate of 7-8 per cent with the meagre additional Plan expenditure of Rs 10,000 crore over last year. Can we expect the rain gods to oblige us once again? Will the Budget catalyse private investment?

Would growth come from the assurance of one job per family for 100 days in the year? Will the scheme be in the field in the remaining months of the year? Or would it also end up like so many other community development programmes, with fake muster rolls of workers and intermediaries pocketing the money?

It raises the question of the delivery system — a point on which the Prime Minister was asked a question in the Doordarshan interview after the Budget presentation.

He could not say anything beyond uttering a few homilies and an announcement that the Government was committed to the Administrative Reforms Commission. Will it be yet another Commission or was he referring to the implementation of the recommendations of earlier ones?

The Finance Minister cannot be faulted. He has done his best under the circumstances with the limited time available to him after assuming office. There is also an assurance that more would be done in the next Budget, to be presented within eight months. But will the Government last till then?

(The author is a former Officer-in-Charge of the Department of Economic Analysis and Policy of the Reserve Bank of India.)