The Hindu Business Line : THE BUDGET'S THREE-WAY FIT

One of the more positive features of Budget 2006 is the remarkable fit between economic growth, tax revenues and government expenditure. While the first two have moved in the same direction, the third has moved in the opposite direction. The first movement suggests the economy has reached a high point in its transition to an open and fiscally compliant market economy; the second reflects the sound economic principle of government retreating when the going is good and stepping in, discreetly, when the rough season sets in. The problem with the economy has been the tendency of most governments to follow their own path — one of profligacy regardless of the needs of the economy. Happily, this seems to be changing with the new buzzword, "fiscal consolidation", actually having an impact. The year 2005-06 should close with the fiscal deficit at around 4 per cent of GDP; for the first time in 20 years the Gross Fiscal Deficit will be less than the Gross Budgetary Support for the Plan in 2004-05 for which actual figures are available.

What makes the reduction even more significant is the buoyancy of tax revenues along with economic growth. The Centre's gross tax revenue has gone up from Rs. 3,04,957.96 crore in 2004-05 (actuals) to Rs 3,70,024.52 crore in 2005-06; the revised estimate for the year is up marginally. Interestingly, direct and indirect taxes both show an equally proportionate increase from the 2004-05 actuals. Not surprisingly, the estimates for 2006-07 have been ramped up in expectation of higher GDP growth. Interestingly, the largest incremental growth in revenues has come from the service tax, up 31 per cent between budgetary estimates and revised figures for 2005-06. The Budget's expectations for 2006-07 have jumped more than 90 per cent over the 2005-06 Budget Estimate. Revenues from excise duties have declined 7 per cent with expectations for 2006-07 falling 2 per cent over the current year's original estimate. On the whole, however, tax revenues are buoyant reflecting a growing economy and also better tax compliance prompted by simplified tax mechanisms and lower tax rates. The gross tax-GDP ratio has risen from 9.2 per cent in 2003-04 to 10.5 per cent in 2005-06 and is expected to grow to 11.2 per cent in 2006-07 reflecting tax efficiency that must be maintained or improved upon.

To that end, the latest Budget has focused on social sector development, infrastructure and agriculture with enormous budgetary allocations for the next round of growth. This is a calculated risk: Budgetary allocations can spur growth and employment and, should the virtuous cycle kick in, shore up the current pick up in tax revenues. Yet those vast sums could easily end up being squandered if unless the implementation of the programmes are not monitored for timeliness and efficiency of delivery.

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