The Hindu Business Line : Budget: Promoting a socially just growth

The Finance Minister has presented a Budget that favours investment, job creation, social welfare, and rural and urban development. The priority now is to ensure speedy implementation of the proposals and put in place an effective delivery system so that the Budget finds expression at the ground level.

BUDGET 2005-06 was presented against the backdrop of resurgent economic growth on the one hand, and fragile government finances on the other. Given this scenario, the Budget has been a fine balancing act, aimed at sustaining economic growth with distributional justice while adhering to the precepts of fiscal consolidation.

In fact, this Budget blends fiscal prudence with bold thrusts in agriculture and rural sectors, and initiatives on social re-engineering, even while promising to achieve economic growth of 7-8 per cent.

The Budget has sent positive signals to the agricultural and industrial sectors, individual investors and tax-payers. The Finance Minister has presented a Budget that favours investment, job creation, social welfare, and rural and urban development. It has rightly emphasised on infrastructure and employment, health and education, and social development.

The Finance Minister has skilfully managed fiscal consolidation. He has sought to augment income by increasing the service tax base and restructuring taxes and duties. The Budget has initiated major tax and financial sector reforms. In doing so, the Finance Minister has put together a package of measures that can propel the economy on to a growth trajectory even while translating the welfare demands of the National Common Minimum Programme (NCMP) into concrete initiatives.

The Budget has also provided a thrust to the industrial sector. The cut in duties on capital goods and raw materials can enhance the competitiveness of the manufacturing sector and help it compete effectively in the international market. Packages have been customised for sugar, agro-processing and textile industries.

The Finance Minister has done away with measures that compel saving in government-controlled instruments. This will ease distortions in the financial markets thereby boosting the capital market, make financing of new investments cheaper and, most important, encourage more players.

The most striking feature of the Budget has been its commitment to fiscal consolidation. The fiscal deficit has been projected at 8.6 per cent higher than last year — Rs1,51,144 crore in 2005-06 (Budget Estimate) against Rs1,39,231 crore in 2004-05 (Revised Estimate). The ratio of fiscal deficit to GDP has been reduced to 4.3 per cent in 2005-06 from 4.5 per cent as per the revised estimates of last year.

At a time when the combined fiscal deficit of the Centre and the State governments is around 10 per cent of GDP, this is a commendable initiative. The revenue deficit of 2.7 per cent (BE) is expected to be the same as the Revised Estimates of 2004-05 and marginally higher than 2.5 per cent, the budgeted estimate for 2004-05.

The ratio of revenue deficit has been projected at 63 per cent of fiscal deficit in 2005-06 compared to 61 per cent in the Revised Estimates of last year.

The projections on revenue collections indicate a positive outlook.

The Centre's net tax revenue is expected to grow by 21 per cent in 2005-06 over the revised estimates of last year. And the tax-to-GDP ratio is expected to touch 10.6 per cent in 2005-06 as against 9.9 per cent in Budget Estimates of the last fiscal. Total expenditure, however, is pegged at almost the same level as last year.

A point to note here is that the expenditure cut is deemed to be effected by containing revenue expenditure, which as a percentage of GDP has increased only marginally from 12.5 per cent in 2004-05 (RE) to 12.7 per cent in 2005-06 (BE).

Non-Plan revenue expenditure has been kept under control, there is even expectation of an absolute reduction in the subsidy bill, and interest payments as a percentage of GDP is expected to come down marginally from 4.1 per cent of GDP in 2004-05 (RE) to 3.8 per cent in 2005-06 (BE). Planned spending will be up by 4.4 per cent on the revised estimates of last year.

Having counted the hits of the Budget, let us now dwell on the misses. A major disappointment is that there has been no radical cut in expenditure.

Optimistic revenue projections are expected to reduce the fiscal deficit and the tax revenue is projected to grow by nearly 25 per cent. However, the revenue targets can be achieved only if GDP growth of the last fiscal is replicated this year as well.

Agriculture too will have to yield a super performance. And if the revenue and growth assumptions do not materialize, the fiscal deficit as percentage of GDP may not be an achievable target.

What is more, not much has been done to cut consumption expenditure of the government. The salary and pension bill of the government together with interest payments, subsidies and defence expenditure still account for the bulk of the expenditure, which without commensurate revenue will make it difficult to contain the revenue deficit.

The government will then have no option but to borrow from the banks. This can lead to deployment of sizeable bank funds in zero-risk government securities that are more attractive than commercial lending.

What is also worrisome is that capital expenditure on non-Plan account as a percentage of GDP is slated to fall from 2.33 in 2004-05 (RE) to 1.1 in 2005-06 (BE).

Similarly, within the Plan, the capital expenditure as a percentage of GDP is expected to drop from 1.5 per cent in 2004-05 (RE) to 0.78 per cent in 2005-06 (BE). This would have definite implications on investment.

The Budget could have used this opportunity to encourage investment in the manufacturing sector that has the capacity to provide employment on a sustained basis.

However, some of the key demands of the manufacturing sector such as revival of investment allowance have not found a place in the Budget.

Besides, a surcharge on corporate tax and lowering rate of depreciation from 25 per cent to 15 per cent should have been avoided as the manufacturing sector is already taxed heavily compared to international standards.

The fringe benefit tax should have been avoided.

The Budget should have introduced second-generation reforms especially as the economy is on the upswing.

While the thrust of the Budget has been the agricultural sector, policy reforms pertaining to the Essential Commodities Act, the Food and Drug Adulteration Act, etc., which come under the purview of the Centre, have not been touched.

There has been no reform on minimum support prices and procurement programmes.

Labour reform should have been given special consideration. In fact, the inability of industry to exploit the benefits accrued from the Budget will be severely constrained by absence labour reform.

Also, no provision has been made for receipts from disinvestment of public enterprises. The priority now is to ensure speedy implementation of the proposals and put in place an effective delivery system so that Budget finds expression at the ground level.

(The author is an economist with the PHD Chamber of Commerce and Industry.)

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