The Hindu Business Line : Harnessing winds of continuity

On the eve of the Budget we learnt that India's three-year compound growth is possibly the highest in her history. The stock market index also has been the highest it ever has been. The current account deficit is the highest, despite strong growth in software and BPO exports. Against this backdrop there is little room for positive surprises. That's why continuity was the best message to deliver. There are no new taxes (but many exemptions are going away). There has been a reduction in Customs duties but an increase in countervailing excise duties, which has retained the effective protection for most finished goods. The much discussed fringe benefit tax has not gone away, but has become a bit less burdensome. There is incremental progress in financial sector reforms, with easing of foreign investment in the debt market and increased limits for investing in foreign assets.

Budget-making, the last few years, has become an art of managing expectations. Given the surge in economic growth all around, the main challenge was to strengthen the status quo. Some of the observers felt that this high-growth phase was a time to announce some big bang measures.

The Finance Minister could have given big tax holidays for infrastructure projects. Or brought all export-oriented units on a par with Special Economic Zones. Or perhaps some big ticket privatisation. Or a `fast-forward' to compensate for last year's `pause' button on containing the deficit.

Obviously these are pie-in-the sky kind of wishes. Any such announcement would have surely earned the Finance Minister as many brickbats as kudos. (By contrast, witness how well-behaved and un-boisterous the proceedings were in Parliament!)

Big tax giveaways (even in the cause of infrastructure) would have displeased the Leftists, and any large expenditure announcement would have displeased the fiscal hawks as well as reform-minded members of the government. So expecting big bang announcements was clearly unrealistic. It is precisely this absence of so-called growth bounties that makes this Budget greatly welcome. The key theme seems to have been predictability and continuity of reforms.

The most remarkable progress is in fiscal consolidation. The numbers projected for revenue and fiscal deficit next year are 2.1 per cent and 3.8 per cent of GDP impressive yet credible, given the growth momentum. But while overall numbers have been achieved, the individual components have been far off target.

Peak customs duties were reduced by 5 per cent last year, and hence overall customs collections were supposed to have decreased by 7 per cent. Instead they have gone up by 11 per cent, a swing of 18 per cent. No wonder next year's target is 20 per cent growth.

Clearly high oil prices and huge increase in non-oil imports have been good news to the customs part of the exchequer. Similarly the growth in services tax collection has been a whopping 63 per cent, against a budgeted increase of merely 24 per cent. This can be attributed to better compliance, administration, efficiency of collection, or of course a much more buoyant services sector, than imagined! These numbers also possibly affirm a supply-side logic, that low and moderate tax rates can and do lead to greater tax revenues. We haven't quite tested the limit of this Laffer curve though.

Finally the large allocations to various components of Bharat Nirman should be seen as promoting public goods, and hence social infrastructure. Consequently the quality of public spending has improved.

The Finance Minister's final quote from Vivekananda about self-dependence was perhaps an appeal to Indian entrepreneurs to harness the reform winds and unfurl growth of private enterprise.

The author is Chief Economist, Aditya Birla Group.