The Hindu Business Line : Budget and the art of the possible

The Finance Minister, Mr P. Chidambaram, has used well the opportunity of a series of post-Budget media interviews to clarify the rationale behind several of the Budget proposals, ranging from taxes to the reform process.

The Finance Minister, Mr P. Chidambaram, has received a number of bouquets together with an occasional brickbat thrown in from commentators. In a Budget that he said he framed with a lot of thought and passion, he has come across as a sympathetic politician, with consideration for growth with justice.

He has deflected interlocutors' criticisms that the Budget lacked the reform-spice by arguing out the long-term reform ideas as in the case of coal energy as well as computer hardware. He has defended his emphasis on the flagship programmes of the NCMP.

Mr Chidambaram has displayed his characteristic originality, as is to be expected of such a competent lawyer. He has defended his stance on the Fringe Benefit Tax (FBT), pointing out that the Chambers of Industry and Commerce have themselves come to terms with it. He has disowned his questioners by pointing out that the FBT is a blow for equity, especially by mentioning the case of a contribution to pension funds of the order of Rs 15 lakh.

The total revenue from the FBT is stated to be around Rs 3,000 crore. I do not see any break-up in the detailed estimates of revenue receipts. Bad taxes have a way of sticking to the statute book. This is yet another. The corporates have to grin and bear it.

No more big-bang changes

In reply to the criticism that the Budget did not show any big-bang reforms, he has argued that he is continually in a reform mode. The days when Budgets are associated with big-bang changes are perhaps over. While the Finance Minister may have been willing to undertake big-brush reforms, his political support system may not have been. Politics is, after all, the art of the possible.

The interlocutors in the TV channel interview were unrelenting in their criticism that the Budget did not show any direction. To this, Mr Chidambaram reacted sharply. He expounded the philosophy behind the Budget, which was intended to give manufacturing a special boost. He rightly pointed out that while growth in the IT-related service sector is alright — and has happened without much Government intervention — it only gives jobs to the highly skilled and trained.

It is manufacturing that can provide jobs for the majority of the candidates that come out of the rural and urban areas. Here, the Finance Minister's vision is absolutely right. I wish he had spelt it out equally clearly in the Budget speech itself.

The emphasis on making India the manufacturing hub for the world in respect of auto industries is part of this vision; so, too, the emphasis on textile. The Budget initiatives are essentially small steps in terms of excise and Customs duty corrections in respect of raw materials and machinery for these industries. It needs much more proactive action, including encouraging the entry of FDI into these sectors. While the policy is broadly in the right direction, it needs to be monitored and fine-tuned in the course of its implementation quite carefully.

Slow growth in

excise revenues

During one of the interactions with the interviewers, the Finance Minister embarked on his favourite theme — the explanation of the slower growth of excise revenues as compared to the increase in corporate profits.

The interviewer had pointed out that excise revenue had grown only 6 per cent, while corporate profits had grown by three or four times that.

The Finance Minister explained that the discrepancy was due to the exemptions in excise, both area-based and industry-based, given in respect of various items as also the export processing zones. Export growth does not bring in any excise growth. While the Finance Minister is right in pointing out that the discrepancy in excise collections is partly due to exemptions, I must point out that the volume of exemptions has not grown dramatically in the last few years.

The exemptions were there in the base year 2003-04, against which the interlocutor was comparing the excise revenue projected for 2006-07 as Rs 1,19,000 crore, against the revised estimate of 2005-06 of Rs 1,12,000 crore. Of this, duties on petroleum products also form a part.

Some of the explanations for the sluggishness in the rate of growth of excise may lie in the Government's tinkering with petro-product prices.

Turning to another aspect of the Budget, the Finance Minister was quite vocal in defending his increased allocation for the Plan, saying: "The Planning Commission is justified and the Plan is justified and every item of expenditure of the Plan is justified."

This is too generalised a defence for Mr Chidambaram to advance.

The fact is that the BE 2006-07 on Plan capital expenditure is Rs 28,966 crore, against a revised estimate of Rs 29,638 crore in RE 2005-06.

The difference is small, but it shows the direction is not in favour of investment. The quality of expenditure is definitely a cause for concern. To the extent, however, that fiscal deficit is financed by borrowing, there is merit in preferably allocating it for worthwhile investments.

Divestment and FDI

The Finance Minister had an interesting defence to offer for the absence of divestment of non-profit-making PSUs, stating that the Board of Public Sector Enterprises Reconstruction has not come out with a recommendation for that.

The Board of Reconstruction of Public Sector Enterprises was created on the analogy of the failed experiment of BIFR and is a creature of the Government. The question of divestment of weak public sector enterprises should be an exercise in financial investment banking. Once a decision is taken at the political level, the right merchant bankers should be engaged to bring interested parties to the table.

The Finance Minister had some interesting remarks on the question of separate limits on FII and FDI holdings. He declared that there was no Chinese wall between the FII and FDI arms of most foreign investors. The real difficulty he hinted at was that continuing the limits might come up against too rigid a ceiling on FDI or FII.

The Finance Minister was at his best when he trounced the critics' views on reintroduction of capital gains tax through the back-door in companies subject to MAT. He pointed out that the provision was already there up to 2004 and it was only fair that corporates subject to MAT should offer their "treasury" profits in calculating the tax base for MAT. Put like this, the Finance Minister's argument sounds almost like child's play. I wish he had come out with it his argument in the speech itself.

Overall, the post-Budget explanations do throw much more light on the Budget than the speech itself.

Perhaps, the explanatory memorandum would benefit by a direct interaction with the Minister himself in the shape of frequently asked questions and answers (FAQs), as is customary in most brand promotions.