The Hindu Business Line : Budget: Needed outcomes, not outlays

The the Budget may now be a non-event for many, especially as major policy initiatives such as on FDI (foreign direct investment), pension reforms or PSU disinvestment no longer form a part of the Budget exercise. Nonetheless, to understand the Budget, one needs to appreciate the economic and the political compulsions of the Government.

The latest Economic Survey has lots of good news:Two consecutive years of 9 per cent growth fuelled by over 10 per cent growth in both industry and services; in the first 10 months of 2006-07 itself, FDI inflows have crossed $12 billion; forex reserves are around $180 billion; and the stock market is booming, hiccups notwithstanding. High growth of the economy is boosting tax revenues withouthaving to tinker with the tax rates.

Rising Inflation

But there is bad news too. Inflation is moving up, hurting the common people most. The rate of poverty reduction has slowed. And, despite initiatives under the PPP (public-private partnership) model, the progress on the infrastructure front is slow.

Many link the high inflation and the limited progress on poverty alleviation to the slowing public investment in agriculture. The average rate of agricultural growth during the Tenth Plan was 2.3 per cent against the target of 4 per cent.

So, in Budget 2008, the Finance Minister, Mr P. Chidambaram, had to rearrange his priorities, focussing on agriculture, education, health, rural infrastructure, employment generation and making more people employable by upgrading skills. He has announced substantial increases in the outlays for education, health, Bharat Nirman projects and various schemes related to agriculture and the rural poor.

Free Imports

In its anxiety to tackle inflation, the Government had had to, even before the Budget, cut Customs duties and allow free import of commodities in short supply, such as edible oil, metals and cement. This was followed up in the Budget the (non-agricultural) peak Customs duty reduced from 12.5 per cent to 10 per cent. This measure will bring the tariff rates closer to the Asean rates.

Mr Chidambaram has left the personal and corporate tax rates unchanged. The service tax rates also remain the same, though the ambit of the levy has been extended to more areas such as renting of premises for commercial purposes. Perhaps, his logic is that if the economy can log 9 per cent growth with the current rates of direct taxes, then why tinker with them. For the individual taxpayer, there is only a token relief. Of greater significance to the taxpayer is that the Finance Minister has not introduced the much-feared EET (exempt exempt tax) scheme, which otherwise would have resulted in tax-saving investments such as PPF being taxed at the time of withdrawal.

Despite the increases in the allocations for education, health and family welfare, the total expenditure is projected to rise only by around 10 per cent in nominal terms. So, in real terms the growth in expenditure would be less than the growth rate in GDP, leading to a fall in the expenditure-GDP ratio.

On the other hand, the tax-GDP ratio has been going up (from 9.2 per cent in 2003-04 to 11.4 per cent in 2006-07). Mr Chidambaram seems well set to achieve the fiscal deficit reduction targets as set by the FRBM Act. However, he is lagging on the revenue deficit front. For 2007-08, the projected revenue deficit is 1.5 per cent of GDP. It is unlikely that he would be able to reach the FRBM target of zero revenue deficit in 2008-09.

Corporate targets

There are some new tax burdens on the corporate sector. The Dividend Distribution Tax rate has been raised from 12.5 per cent to 15 per cent. Information technology companies have been brought under Minimum Alternate Tax (MAT). The benefits derived from employee stock options would be taxable under the Fringe Benefit Tax (FBT). Some concessions will not continue beyond their expiry dates. Return from debt mutual funds will now be taxed; this is fair since interest from bank deposits is taxable.

However, foreign investors are generally happy as there is no rollback on reforms and the FRBM targets are being largely achieved. Surcharge on companies with profits up to Rs 1 crore stands withdrawn. This will benefit smaller companies. It may also encourage large companies to split themselves into smaller entities to avoid the surcharge.

The Finance Minister has increased the fertiliser subsidy. Aware that this would benefit fertiliser companies, given the way the subsidy is administered, he stresses on the need to find an alternative method of delivering the subsidy directly to the farmer but stops short of suggesting one.

Mr Chidambaram himself admitted in his Budget speech that there is no dearth of projects or funds. The real problem is that of administration of the schemes. For instance, last year the NREGS was introduced with a lot of fanfare as the single most important initiative to tackle rural poverty. But the money allocated could not be spent. That is why the expenditure in this Budget for extension of the NREGS from 200 to 330 villages has been gone up from Rs 11,300 crore to only Rs 12,000 crore which, in real terms, is a fall.

Thus, whether Mr Chidambaram's Budget initiatives to bridge the gap between the two Indias will bear fruit can only be judged by outcomes, not outlays. Enhancing allocations is the easier part. Improving efficiency of the delivery system is far more daunting, well beyond the ambit of the Finance Minister.

(The author is a former Professor of Economics, Indian Institute of Management, Calcutta. E-mail: alokray15@yahoo.com.)