The Hindu Business Line : Budget making

THE finance minister meets with different segments of the economy to know their mind what they expect from the Budget. Usually, these groups seek tax rebates relating to their areas or for shifting the load on other segments.

The industrial sector would point to the concessions that agricultural sector gets and its tax-free income, and the agricultural sector at the neglect of farm infrastructure. The only shining example was a suggestion some time ago from the chairman of a leading information technology company for recovering higher tax from high income IT employees.

It would perhaps be better if the Finance Minister asks the groups that meet him to come up with ideas for increasing the revenues from their areas or for removal of anomalies without resulting in any loss of revenue.

But there are certain basic premises on which there can be no two opinions. That the level of deficit cannot be allowed to widen further. The Centre's deficit has been 5-6 per cent of GDP over the past five years. But the revenue expenditure as a percentage of total expenditure was a high 83 per cent in 2004 and the revenue deficit as a proportion of the total fiscal deficit about 80 per cent. The shortfall in finances is met by internal debt, which had grown steeply to almost 78 per cent of GDP as at end 2004.

The worrying aspect is that these debts go towards meeting the revenue expenditure with the capital outlay as percentage of the total expenditure going down. The rise in oil prices and the stiff import bill without simultaneous full recovery from the users will add to the Minister's woes. The government would be compelled to prune both Plan and non-Plan expenditure.

The Finance Minister has also to ensure the rate of growth does not fall below the expected 6.5 per cent. The Budget should, therefore, be growth oriented and spur investments in manufacturing and services sectors. There is also the imperative to invigorate the farm sector by speeding up agricultural reforms, improving the infrastructure in the villages by adequate investment and bring quick succour to the people below poverty line. The ambitious employment guarantee for 100 days for one person in a family appears made in haste. This would call for an astronomical outlay, but where the funds will come from is not clear. The modalities of this programme are also complex and confusing. Be that as it may, there is the compelling need to enhance the revenues by rationalising the taxes, and widening the net to capture high net worth individuals and those groups that have managed to be out of it.

The rationalisation and right targeting of subsidies, restructuring of the loss-making enterprises and steps for better expenditure management are areas that should engage the immediate attention of the Finance Minister. There is also the need to continue with financial sector reforms. The acceleration of disinvestment process even if only to narrow the deficits brooks no delay. Equally, the Government can ignore the areas of education, health, and housing, especially of the poorer sections, only at its peril. There should be a realisation that faster growth of the manufacturing and services sectors is quite compatible with higher realisation of resources from these sectors for Plan and non-Plan expenditure. Chronic problems call for harsh measures. Progress can be made only at a price.

Budget making is tough even in best of times and can well be imagined after a tragedy has visited the nation. The December tsunami has imposed an enormous burden on the Centre and the affected States notwithstanding the heavy inflow of aid and donations from the people. The impact of this calamity will surely be felt on the Budget too.

Some change in the deployment of resources may be necessitated. The one question that comes up often is how the Finance Minister is going to find the massive resources needed to achieve the many objects set forth by the Government. The FM did not change the corporate and income tax rates in the last budget and relied upon 2 per cent education cess, transaction tax and extension of service taxes.

No doubt the implementation of VAT from April 2005 would bring about structural improvement and increase the efficiency of indirect taxes and result in a larger collection. Also effort would be made to augment collections of Custom duties, and corporate and income-taxes. But these may not be sufficient. The partial disinvestment of two PSUs may yield an expected paltry Rs 1,500 crore. Government borrowing in the market may not be desirable as that would affect interest rates and also crowd-out private investments.

The burden on account of interest is quite high already. The Government may have no option but to rely on larger foreign direct investment. It may have to remove restrictions and simultaneously de-list the areas reserved for small industries. A 7-8 per cent growth means larger investments. FDI is linked to export growth and conditions favourable to export would be necessary to attract FDI. Good infrastructure, favourable labour laws and attractive tax rates are things foreign investors would look for. For India to attract even $10 billion, it must become investor friendly and show stability in its economic philosophy irrespective of the ruling coalition.

The National Common Minimum Programme's approach — relegating divestment of PSUs to the backburner, selective opening up to foreign investments and a disinclination for labour reforms — may not exactly be FDI-friendly. It is here that UPA Government and its allies should sort out issues internally. A ruling coalition pulling in different directions is hardly confidence building.

Indeed a tough task ahead for the Finance Minister.

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