The Hindu Business Line : Budget: Will high expectations be met?

ON July 8, the Finance Minister, Mr P. Chidambaram, will unveil the Union Budget. Expectations are high, based on the experience with his last "dream" Budget. But, currently Mr Chidambaram has to operate under difficult constraints. Above all, the constraint of the coalition and the CMP is harder than the one he faced on the last occasion.

However, the economy is in better shape in terms of GDP growth as well as forex reserves. How will Mr Chidambaram meet the high expectations of the markets and the people have of his Budget?

It is alright to say that the CMP offers the best of all politically feasible compromises. However, Mr Chidambaram cannot afford to forget the many costly promises it has made in terms of new expenditure and, in particular, allocations for pet projects of various partners.

The commitment to provide employment to all able-bodied persons in India for 100 days a year is obviously an open-ended one. Its financial implications are still to be calculated in detail — apart from the nuts and bolts of an employment guarantee programme. There are also commitments of increased educational spending proposed to be met by a cess.

The Finance Minister has to find funds for all this and more and yet stay within his commitment reiterated in the CMP to cut revenue deficit by 2010. At the same time, he cannot afford to raise tax rates too high, lest they scare off investment. Buffetted between an expenditure wish-list and a fiscal straitjacket, Mr Chidambaram's task is truly challenging.

Mr Chidambaram has gone public with his declared preference for more investment in the economy. There are even talks of an Investment Commission.

The Finance Minister had set up the Infrastructure Development Corporation (IDC) to speed up investments in infrastructure. He has to take steps to revive the institution, caught as it is in the aftermath of an ill-advised but aborted attempt to merge it in the State Bank of India.

The IDC has to become more active than it has so far been. Mr Chidambaram will do well to reactivate his earlier creation.

The recent visit of the Finance Minister to Mumbai has led to a flurry of speculation. That it did not answer all stock market aficanados' fears and wishes is inevitable given that their expectations are always too high. But, Mr Chidambaram has set the right tone in his remarks about the stability and direction of policy at the Centre.

One should not read too much into the news that he has promised "sexy" initiatives, as reported in a section of the media. The response of corporate circles and the investment community has been guardedly optimistic.

Whether the Sensex will rise after July 8 is, of course, a different question. No Finance Minister has as yet found the magic wand to excite the markets — barring, of course, Mr Chidambaram himself, to some extent, in the last Budget he presented. He is, therefore, our best bet.

Whether Mr Chidambaram will be able to balance his Budget without too heavy a dose of taxation is a matter of some concern. Fortunately, Mr Chidambaram and the Government as a whole have cleared the decks for the Budget exercise by boldly moving upfront to adjust the prices of petroleum products.

The UPA Government had to make up for the damage done by deliberate inaction by the NDA Government in regard to the petroleum product prices. The Election Commission had come within a close distance of investigating this deliberate inaction.

The previous NDA Government did not pass on the global increase in crude and product prices to the consumer in order to gain political mileage. The present Government has had to rectify the damage, which it has done with courage and transparency. The people at large will understand that the rise is inevitable, given the global scenario.

The UPA Government is, however, fighting shy of the need to raise prices of kerosene. Kerosene subsidy has been, over time, one of the most ill-advised of Government interventions in the petroleum products pricing. At a minimum, it leads to further incentives to divert kerosene to mix with diesel.

The motivation for continuing "cheap" kerosene, ostensibly to help poor people, will only encourage further abuse of cheap kerosene by transport operators and starve kerosene supplies to the poor. It is hoped that Mr Chidambaram will be able to convince his colleagues of the need to address the issue as well, at least at Budget time.

I now turn briefly to revenue prospects. The 2004-05 Interim Budget's expectations of revenue collections as well as deficit estimate in 2003-04 seem to have been almost fully realised and the anticipated deficit numbers also have been nearly attained.

This reflects a higher revenue collection as well as a lower pace of expenditure. (Provisional actuals of revenue deficit are Rs 98,308 crore against a revised estimate of Rs 99,860 crore). The total revenue in revised estimates 2003-04 was Rs 263,027 crore.

The provisional actuals come close at Rs 263,000 crore. Taxes in RE 2003-04 were Rs 187,339 crore matched by provisional actuals of Rs 186,932 crore. The non-tax revenue has been higher at Rs 76000 crore compared to revised revenue estimates of Rs 75488 crore. All this shows that the prospects of managing the fisc are bright, assuming the trends shown in 2003-04 continue.

As it turns out, the fiscal deficit for 2003-04 stood at Rs 1,25,960 crore close to revised estimates of Rs 132,103 crore, partly due to the higher realisation of privatisation proceeds.

It is not clear to what extent the pre-election confusion in Government's policies contributed to slowing down of expenditure and thus helped the NDA Government to attain a lower deficit can be discussed only after full details of provisional actuals of expenditure are obtained at the time of the Budget.

But it seems plausible that the confusion did lead to a substantial surrender of allocations made, especially in respect of defence procurement.

Given this fiscal picture, Mr Chidambaram may find it not too difficult to balance the Budget provided he has leeway on the privatisation front. Mr Chidambaram's focus on higher public investment, in particular in infrastructure and rural areas, as a means to achieve a higher rate of growth and better provision of jobs and infrastructure, is logical.

It is, however, going to be difficult to find resources directly from the Budget for the various new projects he has in mind, given the overall fiscal situation. He will necessarily have to depend on using bank funds through various public-private partnerships. He has also to resort to tightening the compliance on tax collection — an exercise he undertook with remarkable success last time around. Whether he has in his armoury more schemes like `one-in-six' is yet to be seen.

The Kelkar Task Force's report is yet to be acted on. I do not foresee the present political dispensation in UPA touching Vijay Kelkar's recommendations on taxation of agricultural incomes, although they make eminent sense. But much of the rest of the report is readymade material for Mr Chidambaram to act on.

He will also be on politically correct ground in implementing the Kelkar's recommendations by and large since they have received a measure of support. There is, of course, the hardy perennial — the removal of exemptions, which forms the kingpin of Kelkar's recommendations.

Mr Chidambaram will have to tread warily before he removes all the exemptions, which Mr Kelkar has targeted. Many of these exemptions serve a social purpose and it would be imprudent to irritate too many people and interested groups for too little gain.

The Budget that is to come on July 8 cannot be expected to incorporate all the new initiatives that the new Government has thought out. Indeed, I believe there is need to give the Government some more time for the Montek Singh Ahluwalia team to settle down.

Maybe Mr Chidambaram will reserve all his firepower for a mid-year Budget, which can fully incorporate the new initiatives that the Government is able to work out. The markets can flourish in the expectation of further goodies to come — higher growth, better profits and stability to usher in a new era of prosperity.

Will the Budget be a "high-tax" one? Will it manage to keep the target of fiscal deficit? Will it be populist? These are the questions to which we will get an answer on July 8. As far as I can see, Mr Chidambaram will not impose heavy taxes nor raise the rates of existing taxes.

He will surely manage to hit the estimated fiscal target which the interim Budget of Mr Jaswant Singh had indicated. Given lower privatisation proceeds, he faces a problem. He will have to resort to speeding up capital investment through extra-government resources, such as those available with banks, by using public-private partnerships and the Infrastructure Development Corporation.

All in all, I believe Mr Chidambaram will produce a Budget on July 8. It will not, however, excite the bourses but will bring hope and succour to the people at large — with moderate changes in taxes and good investment policies.