The Hindu Business Line : Budget 2005-06: Will UPA Government pass the litmus test?

A 7-8 per cent GDP growth can become possible in the coming fiscal year on the strength of the remarkable upturn in industry and buoyant growth in services, hopefully with a satisfactory monsoon, but the Government and the Reserve Bank of India will have to be on guard for keeping inflation well within 5 per cent and for quick response to any external shock arising from the global imbalances.

THE Finance Minister, Mr P. Chidambaram's Budget for 2005-06 can by no means be another annual extravaganza but has to be a landmark in the first real test of how far the UPA Government stands ready to deliver on promises of the National Common Minimum Programme. It will have far-reaching political implications, let alone its drive for higher economic growth and greater liberalisation for the success and stability of the Congress-led coalition

Will the Budget help to put India firmly on sustained high growth of 7-8 per cent? Will it create more jobs? Will it be strictly non-inflationary? Above all, will it make credible efforts to usher in the new deal for rural India? The litmus test will be how far the Budget rises to the expectations of hundreds of millions whose hopes have been raised by the UPA Government's professed commitment to social equity as its central philosophy.

It is widely assumed that when Mr Chidambaram unveils his Budget on February 28, it will set the tone of the Manmohan Singh Government's five-year term with a road-map for accelerating growth with massive investment thrusts in infrastructure and social development in conditions of relative price stability and adherence to the medium-term fiscal policy framework to wipe out revenue deficits by 2009.

The Prime Minister has promised to lower the barriers to growth and Mr Chidambaram has been indicating an industry-investor-friendly Budget with major tax reforms, expenditure control and safeguarding the interests of the poor. Primacy will be given to agriculture, the foundation for rural prosperity and rural development — in which public investment plays the larger part — while more incentives will be held out for spectacular advances in infrastructure to draw in huge capital requirements, domestic and foreign.

The setting for the Budget is most favourable for the Finance Minister. The first year of the UPA Government 2004-05, will end with GDP growth close to 7 per cent (6.9 per cent, according to the CSO's advance estimates), a more-than-expected rebound in a difficult year of weak monsoon, oil price shocks and an inflationary flare-up.

By end-January, the annual rate of inflation had been brought down to 5.2 per cent through effective, though costly, intervention by Government and the RBI. It will be the first year when the economy has been decisively pushed forward by industrial resurgence — manufacturing recovering to 9 per cent — and services, signalling a reversal of the historic dependence on agriculture.

Exports have boomed this year, and domestic demand for consumption and investment keeps imports higher but it is the steep rise in international oil prices that largely contributed to the $22-billion trade deficit in the first ten months of 2004-05 but the country continues to build reserves, although at a pace slower than in 2003-04. India's global competitiveness is growing and gaining international recognition.

The corporate sector is on a boom and business confidence remains high as never before. Investment has revived and the stock market has been mostly bullish. Domestic savings show a significant rise. Investments are picking up. The social and economic challenges before the Government cannot be met without massive resource mobilisation efforts.

The first task is to widen the base of taxation to raise the tax-GDP ratio to at least 11-12 per cent in the coming year. The Finance Minister says he is committed to moderation and stability in tax rates. In the July 2004 Budget, he had virtually raised the tax exemption limit to Rs 1,00,000.

This is as far as he could go, high enough for still a poor country such as India, and so his exercise in the coming Budget would be mainly to re-visit the rate and slab structure with adjustments having potential for higher revenue and to do away with several exemptions, broadly on the lines of the Kelkar Report (2003).

It may be selective because any blanket approach would have social implications.

To provide comfort to industry, there could be a slew of proposals, including liberal depreciation allowances for specific purposes such as R and D. It is as well that the corporate tax at 35 per cent is left as it is for the present, especially when the Finance Minister might be restructuring the personal income-tax structure.

One cannot exclude the possibility of the Finance Minister proposing a consolidated cess/surcharge at 5 per cent or so, subsuming the education cess of 2 per cent as a social obligation that income-earners paying tax should be willing to bear for the tasks of uplift of the poor and for emergency relief in times of natural calamities such as the tsunami.

The Government's declared commitment to essential reforms designed to raise farm growth and diversification, boost the industrial sector's competitiveness, attract large flows of capital for infrastructure and strengthen the financial and regulatory systems will be reflected in the Budget. Selective liberalisation of the FDI regime is already under way.

Taking advantage of the highly favourable macro-economic environment and the international standing and credit rating that India enjoys at present, it should be feasible for the Finance Minister to give a push to reform process, without ignoring Left susceptibilities. Trade policy liberalisation is likely to be taken a stage further by reducing the peak rate of Customs duty from 20 per cent to 15 per cent consistent with the goal of gradually aligning tariff rates to Asean levels.

The indirect tax structure, as has been the case, will undergo considerable modification in the coming budget, both under Customs and excise, while the service tax, now applicable to over 70 services, will get further extended.

Services, with a rising share accounting for over 50 per cent of GDP, must make a greater contribution to the exchequer. The Finance Minister has said he would be restructuring the duties in petroleum products, textiles (man-made fibre), sugar and telecommunications

While the underlying rationalisation of the indirect tax structure is to remove disincentives while mopping up additional resources, the Finance Minister is expected to take care to frame his proposals in a way that he does not add to price pressures. Any loosening of the grip on inflation will put the country at the risk of runaway inflation. A whole lot of fiscal incentives would be given in agriculture-related goods, plant and equipment. Irrigation and rural electrification are being marked out for greater attention.

Apart from duty relief and new incentives, the Budget may come up with a mechanism for public-private participation. A special purpose vehicle with a corpus of Rs 10,000 crore may be proposed to catalyse such participation. Tax holiday provisions may be extended for key infrastructure projects such as power, while Railways, which appear to have stabilised its internal finances, may get additional budgetary support.

Whatever the extent of realisation of this year's budgeted tax revenue, the deficit on revenue account, which was offtrack, would exceed the budgeted 2.5 per cent of GDP. A reduction in revenue deficit would certainly enable the Government to allocate more resources for productive investments. A bold strike on both revenue and expenditure sides could embolden the Finance Minister to project the revenue and fiscal deficit targets next year at 2 and 4 per cent of GDP respectively.

The Government is expected to spell out afresh its policy on the public sector — restructuring, limits of disinvestment and strategic control — to allay misgivings, especially among Left parties. The Budget may still play it safe with a moderate assumption like Rs 5,000-6,000 crore by way of sale of minority holdings, the proceeds of which will go the proposed National Investment Fund to be used for social sector schemes and capital investments within the public sector.

Expenditure reform has been given little attention beyond token gestures. One major area is subsidies, on which the Finance Minister will have some proposals to contain growth through "better targeting". Food and fertiliser subsidies, being important for the poor, will not be tampered with, though in fertilisers, the bigger farmers usurp the benefit. One of the ways to bring down food subsidy would be to limit Food Corporation of India's over-reach in procurement and storage.

GDP growth of 7-8 per cent is possible in the coming fiscal year on the strength of the remarkable upturn in industry and buoyant growth in services, hopefully with a satisfactory monsoon, but the Government and the Reserve Bank of India will have to be on guard for keeping inflation well within 5 per cent, on average, and for quick response to any external shock — such as exchange and interest rate developments — arising from the global imbalances.

(The author is a former Chief News Editor of PTI.)

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