The Hindu Business Line : WHERE DOES THE BUDGET SQUEEZE?

Going strictly by the evidence presented by the Opposition during the debate in the Rajya Sabha on the Budget, it is difficult to come to the conclusion that the Government is squeezing the vast majority of rural poor to achieve whatever additional tax revenues that the Government is hoping to garner the coming fiscal. The Opposition case rests on the argument that the latest National Sample Survey points to a decline in the per capita consumption expenditure by 80 per cent of the rural households, and as for the rest their per capita incomes have risen by a measly four per cent. Given that there are no significant new taxes, the Opposition contends that the existing tax payers, including the rural poor, will be made to cough up Rs 75,000 crore more to finance the public expenditure.

Samples often tend to distort the reality of the universe and when it covers only a section of the population, in this case Rural India, the problem becomes more acute. The average four per cent increase in the personal incomes of the rural population may well mask the contribution of the few outliers with large incomes living in the rural pockets. Then, of course, there is nothing to suggest that the urban rich and the private corporate sector are not contributing to the additional tax revenues. There is no denying the vast unfinished development agenda before the Government. But taxing the corporate sector a little more may not be the answer, at least not at this juncture. The Government's capacity to spend on development programmes is constrained by its administrative processes, as the Finance Minister himself admitted during the debate in Parliament. Hence, higher mobilisation may not translate into larger outlays even as it impoverishes the taxpayer.

Any money extracted from the corporate sector by way of additional taxation leaves it with that much less for investment. The leveraging potential of the rupee left untaxed is huge: every rupee of earning, it is worth noting, can be used by a company to raise at least Rs 15 in the capital market, given a conservative earnings multiple, and Rs 30 of debt funds, assuming a debt-equity ratio of 1:2. The corporate sector, as the Minister pointed out, is going through an investment phase. The earlier wave of capacity creation launched in the mid-to-late-1990s has been fully absorbed and supply constraints are beginning to emerge. The optimism permeating the business community is also attracting overseas capital to participate in the emerging opportunity. This is reflected in a buoyant capital market although the valuation might appear a little stretched. In the circumstances, the Government ought not to do anything that undermines investor confidence.

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