The Hindu Business Line : Two views on the Budget

Those who have been enjoying tax exemptions have to take responsibility. The Government has to focus on education, health and social infrastructure. — DR PARTHASARATHI SHOME, ADVISER TO THE FINANCE MINISTER

DR PARTHASARATHI SHOME, ADVISER TO THE FINANCE MINISTER

The fourth Budget of the Finance Minister, Mr P. Chidambaram, was a far cry from the one he presented a decade ago, when he set in motion sweeping tax cuts that earned him encomiums. This time around, Mr Chidambaram barely had elbow room for innovative actions circumscribed by the mandated Fiscal Responsibility and Budget Management Act (FRBMA). Yet, within the constraints, the Finance Minister deftly balanced the interests of the UPA government for inclusive growth without aggravating inflationary forces and the need to tread the path of fiscal prudence with finesse.

However, in the process, India Inc. and supporting allies from outside, such as the CPI(M), are disappointed that the Finance Minister has lost the opportunity to present a Budget that would have pleased all in terms of reducing the tax burden and ensuring gains of growth more dispassionately, especially when inflation has emerged as the cruellest form of taxation.

To get different perspectives on the underlying objectives of the Budget that has apparently failed to set the market soaring, Business Line spoke to two people closely associated with Budget-making who act as the eyes and ears of the Finance Minister — the Adviser to the Finance Minister, Dr Parthasarathi Shome, and the Chief Economic Adviser, Dr Ashok Lahiri.

This is what Dr Shome had to say on the Budget:

"In terms of tax reform on the whole, it was to not touch the major portion of the structure and the rates that were working well on the basis of which manufacturing and services sectors were exhibiting excellent rates of real growth. At the same time, some of the exemptions have kind of matured and the exempted sectors are ready to pay tax. Yet, in some areas, such as infrastructure, business tourism and commonwealth games, some exemptions are needed. In particular, certain manufacturing sectors — for instance, footwear or food processing — have been identified because they are job-oriented and some additional accommodation has been given. Thus, within the tax reform area, the focus has also been on equity. If you look at the Receipts, under revenue foregone, one can see that companies with profit above Rs 500 crore — 113 of them — accounted for 49.87 per cent of the total profits before taxes and their share in total taxes was 49.46 per cent. But their effective tax rate was only 19.10 per cent, which is lower than the sample companies with profits before taxes of up to to Rs 1 crore.

The effective tax rate of the entire sample was 19.26 per cent, substantially lower than the statutory tax rate of 33.66 per cent. Hence, to encourage small manufacturers and correct the inequity of distributions of effective tax rates, the surcharge on income-tax on all companies with a taxable income of Rs 1 crore or less has been removed.

Another example of bringing equity into the tax structure is that of small-scale industries. Unlike in the value-added tax in most countries as well as in the Indian States, where there is a compounding system for the small producer/service provider who pays on the basis of turnover, in the excise duty structure, we do not have a compounding system. Given the wonderful economic environment, the opening up of the economy and the competition they are facing, SSIs need be to be accommodated. Hence, the excise exemption limit hike from Rs 1 crore to Rs 1.5 crore.

Yet another equity-promoting measure in the inflationary environment is to leave Rs 1,000 in the pockets of most people and Rs 2,000 in the pockets of senior citizens; that would allay some difficulties.

If you see development of the tax system and tax revenues over time across the globe, in developed countries the proportion of direct tax is even higher. In middle-income countries, it is about balanced and in the more developing countries the indirect tax is higher and so is the Customs duty. So, this year, we have pegged 9.4 per cent as the average rate, which is very close to Asean rates and equal to two of the Asean countries.

We are moving along. Customs tariff reform is continuing. If imports increase, Customs revenue will also flow in. But the rate structure does have a negative impact, so we have to be ready with that.

Service tax, on the whole, has picked up and it is about 5 per cent of GDP. It is difficult to see where the service tax should go. The Finance Minister is very keen to have a sort of benign tax administration and let the whole service tax culture settle in and then tighten the administration.

The Minimum Alternate Tax has been introduced for export-oriented units, given the emphasis on equity and those who have been enjoying tax exemption benefits have to take on some responsibility. The Government has to provide services such as education, health and social infrastructure. Ultimately, an effective tax rate is one that encourages the inflow of revenues to implement programmes of development.

And here are Dr Ashok Lahiri's views:

DR ASHOK LAHIRI, CHIEF ECONOMIC ADVISER

Two views on the Budget have been expressed from completely different angles. One is that Budget is not as counter-cyclical as it should have been. Inflation is going up. Revenues are doing well. So this was the time when the fiscal stance has been even more restrictive. The other is that the Budget has not done enough — growth is fine, so why don't you expand more and make sure the Government spends all the possible money it can? What the Finance Minister has done is to strike the golden mean.

First, whether it should have been counter-cyclical. If you look at the tax-GDP ratio, it went up from 10.3 per cent in 2005-06 to 11.4 per cent in 2006-07, an increase of 1.2 percentage points in one year and now the target is 11.8 per cent. We have also increased expenditure on capital account from 1.83 per cent (revised) in 2006-07 to 2.65 per cent for 2007-08.

About whether the Budget should have been more expansive, some questions were raised on GDP assumptions. We have taken the 2006-07 number as an advance estimate, which is Rs 41, and a 13 per cent growth is assumed on top of that to give you something like Rs 46.32 for 2007-08.

What one forgets is that it is not WPI inflation that goes into GDP calculation but the GDP deflator. So, if you look at the nominal growth of GDP in 2006-07 — over the quick estimate for 2005-6, it is 15 per cent. Now, the AE for 2006-07 expects GDP to grow at 15 per cent. Should we assume anything more than 13 per cent for 2007-08? The Budget, strictly speaking, does not have to assume anything about real growth and inflation.

If the GDP deflator has always shown a tendency to grow, GDP inflation is about 70 per cent of WPI inflation. That is the historic average. There are years when it is higher or lower but, normally, a high inflation year is followed by a low inflation period. I don't think the GDP assumption is conservative. It is just about right. In fact, it was slightly more expansive than what it was in the earlier years of 12 per cent.

The Budget has reduced the revenue deficit exactly as mandated by the FRBM Act and the challenge facing us is how to observe in letter and spirit the provisions of the FRBM Act as far as revenue deficit is concerned. If you have reduced 2.14 per cent to 1.54 per cent, will you be able to reduce 1.5 per cent of revenue deficit in one year?

I don't think there are too may doubting Thomases as far as the fiscal deficit is concerned. If you look at the country's fiscal history, the deterioration started not with fiscal deficit but with revenue deficit. Most prudent governments try to follow the golden rule and, if you have assets built with borrowed funds, at least you have something concrete to show and there is no example of any country doing well while the government is becoming bankrupt.

There is no retrogressive proposal. The Budget strikes the right balance between augmenting the growth momentum and continuing with fiscal consolidation. The Finance Minister has beautifully put it that "faster economic growth has given us, once again, the opportunity to unfurl the sails and catch the wind". The Budget provides enhanced outlays for education, health, eight flagship programmes of Bharat Nirman and agriculture in an innovative fashion.

The criticism on the dual tax regime for cement is surprising when there is such a regime in place for footwear. It has been introduced for biscuits. When it is reduced, you don't complain. In cement, the tax is the same whether you build palaces with white cement or small homes with ordinary cement. The tax is not ad valorem and, in a way, the specific duty is trying to become ad valorem and the Finance Minister has said that it is being done to ensure reasonable prices of cement."