The Hindu Business Line : Congress borrows, spends, wins

The Budget for 2009-10 has ensured that almost everyone - people as well as companies - will have to pay less tax now. True, the reduction in the tax burden is not very much. But it is there. This is the good news. Also, a dog with a bone in its mouth does not bark.

The bad news is that the Government will nevertheless - in spite of earning less - spend more. This is only partly because it should, and largely because, for political reasons, it must. For instance, the Congress won the 2009 election largely on the back of huge giveaways in the form of subsidies, loan waivers and higher rices to farmers amounting to almost Rs 500,000 crore over three years.

The question we must ask is: how will the Government fund the gap between revenue and expenditure? And the answer is an old-fashioned one: it will borrow around Rs 1.5 lakh crore more than it did last year. Such a huge increase in borrowings has been become necessary largely because of all the new social sector schemes. In a sense, we are back to the days of "direct attacks on poverty". The difference is that, in those days, these used to be funded by very high rates of taxation, up to even 90 per cent at the margin.

But such high rates are no longer considered any good. So the Government is resorting to the method that any spendthrift adopts: just borrow more.

Borrowing more

The same thing happened in the 1980s also, because it was under Rajiv Gandhi that tax rates started to come down and borrowings began to go up. But there is a key difference between then and now. In those days, the extra borrowing could be "monetised" which means it would be paid by simply printing the number of rupee notes that were needed. But since 1998, even that is not possible because the Government agreed not to do this as it caused inflation.

So now there is only one option: the Government, companies and the people will all have to borrow only from a single national pool. So, the more the Government makes off with, the less is left for the others.

This means two things. One is that the price at which loans are available to non-Government borrowers will go up. In short, be prepared for higher interest rates. The other is that a lot of money will be wasted by the Government. Higher interest rates mean less borrowing.

Less borrowing means less spending, both on consumption by people and investments by firms, which is the total of private sector expenditure. Less spending means less demand.

Less demand means lower output. And lower output means lower growth. Lower growth means fewer jobs. And that means lower demand, and so on and on and on.

In other words, the huge government borrowing, of over Rs 4,50,000 lakh crore (up from Rs 3,06,000 crore last year) is going to have a very adverse impact on the economy - though perhaps not on the electoral prospects of the Congress. Don't forget: elections in Maharashtra are due in October and much of the JNURM money could well get spent in towns there. In itself that is good, provided the money is spent productively.

So this is the biggest problem with the UPA-II's first Budget. It reads like an election-year Budget. One shudders to think what the future holds.

Revenue foregone

Coming to the nitty-gritty of the Budget itself, it is a fairly straightforward statement of accounts. Possibly the most interesting sub-document is in the Receipts Budget. It is called "Revenue foregone under the Central Tax System: Financial Years 2007-08 and 2008-09." Such a statement was first put out in 2006-07.

It is very revealing statement inasmuch as it shows how much companies and individuals do not pay as tax because they are legally entitled to claim the amounts as a tax deduction.

The total comes to over Rs 4 lakh crore. It turns out, for example, that companies with a profit before tax of between Rs 10 and Rs 500 crore pay the least tax because the effective tax rates of these companies are absurdly low. But who made it that way, anyway?

The lack of space prevents a full statement of how much revenue the Government gives up so some indicative figures should suffice. First of all, the total revenue foregone in 2009-10 will be Rs 68,914 crore.

The biggest chunk of this is accounted for by accelerated depreciation (Rs 14,344 crore). Next comes export profits of STPI units (Rs 11,734 crore).

This is followed by export profits of export-oriented units (Rs 7,274 crore).

And so on until one comes to the last entry, numbered 39. One interesting entry is No 27, under the heading "Deductions of profits of industrial undertakings derived from the production of Mineral Oil." The deduction is Rs 3,106 crore for 2009-10.

If all the deductions went, the Government would not have to borrow at all.

More Stories on : Budget | Infrastructure | Politics | T.C.A. Srinivasa-Raghavan

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