The Hindu Business Line : Budget should balance growth with distributive justice

India Inc. would argue for larger fiscal concessions/exemptions and lower interest rates on their borrowings. The government, however, has to assess national priorities and take considered decisions on allocations of resources, says S. S. TARAPORE.

Unlimited exemptions are incongruous in a caring and just society.

The first Budget of the newly-elected government would be presented on July 6. There is understandable euphoria and great expectations from all segments of society. It is essential to recognise that the Indian fisc has severe resource constraints and a spate of demands — a classic case of Lionel Robbins’ scarce means with alternative uses.

There is the legitimate demand for larger social sector outlays, clamour of industry for increased incentives, foreign investors demanding a more favourable investment clime and individual tax payers wanting enhanced exemptions/concessions. All these demands are legitimate but they have to be considered against the macroeconomic constraints.

Growth projections

There are various projections for the growth of the economy in 2009-10. At the lower end of the scale are projections of a real growth of 6-6.5 per cent while upbeat projections range up to 7.5-8 per cent. While each projection has its own rationale, it is important to know the specific growth projection on which the Budget has been framed. It would also be desirable to have an upfront projection of nominal income growth which would then reveal the kind of inflation built into the Budget.

There are risks in generating expectations of immediately reverting to a 9 per cent growth rate. It would be best to recognise that the global crisis inevitably has some impact on the Indian growth rate.

A realistic objective could be to gradually claw back to the growth rate of 9 per cent by the end of the five-year period of the present government. The art of good management is to optimise growth and distributive justice.

There is the enervating issue of the gross fiscal deficit. As against a Fiscal Responsibility and Budget Management Act, 2003 (FRBM) target of a combined gross fiscal deficit of the Centre and States of 6 per cent of GDP, the deficit in 2009-10, inclusive of the quasi-fiscal deficit, is estimated at 12-13 per cent of GDP.

It is unbelievable that some top policymakers have argued that since the government does not have resources to finance certain expenditures, there is resort to an off-budget quasi-fiscal deficit. It is stultifying that, in this day and age, such naïve financial engineering is used to paper over the malaise of the fisc.

Eschew fiscal fudges

The circumstances under which the three successive fiscal stimuli were implemented is appreciated but this is no excuse for fiscal opaqueness. The government would gain considerable credibility if it were to upfront acknowledge that the combined gross fiscal deficit is 12-13 per cent of GDP in 2009-10 and then work with the Finance Commission to bring it down to 6 per cent of GDP over the next five years.

The government should move over to the concept of a Public Sector Borrowing Requirement (PSBR) which would once and for all put an end to the nonsense of a quasi-fiscal deficit.

While moving over to a transparent fisc, the government must totally eschew fiscal fudges. Some respected opinion-makers have argued that if the government were to sequester the internal reserves of the Reserve Bank of India (RBI), the gross fiscal deficit would fall to zero! The Prime Minister, many years ago, had asserted that strong financial institutions are hard to come by in India and, therefore, nothing should be done to undermine the strength of institutions such as the RBI.

While extreme conservative advocates could argue for an immediate correction of the fisc, it needs to be recognised that in any brutal adjustment it would be the social sectors that will bear the brunt.

The President’s Address to Parliament unequivocally commits the government to a policy of inclusive growth with the strengthening of various programmes on employment, education, housing, health and water supply and, as such, the government does not have the option of reneging on these commitments.

India Inc. would eloquently argue for larger fiscal concessions/exemptions as also lower interest rates on their borrowings — that’s the job of India Inc. The government, however, has to take a broader assessment of national priorities and take considered decisions on allocations of resources.

Taxing dividends

In the area of direct taxes, India has moved from a punitive regime to one of the most liberal systems. The system is now so structured that large tracts of income have been freed from any form of taxation.

Over the past decade or so — during the Gowda-Gujral regime — receipt of dividends by individuals was made totally exempt from income tax. It was erroneously argued that as corporates had paid income tax, taxing individuals on dividends would be tantamount to double taxation.

It is a basic principle of public finance that the corporate and the individual are separate entities and should be taxed separately. The present situation is totally untenable in a just society.

Persons enjoying thousands of crores of dividend income are entirely free from income tax while others who earn relatively modest incomes from professions are taxed at high rates. Such unlimited exemption of dividend income is reflective of a plutocratic regime and this is not on all fours with the avowed commitment of the present government to distributive justice.

To top this, long-term capital gains from stock market transactions, gifts and wealth in the form of financial assets are free from tax. Where senior citizens with modest incomes are subject to maximum income-tax slabs, such unlimited exemptions are incongruous in a caring and just society. Such unlimited exemptions are nothing short of a fiscal atrocity.

There is pressure on the government to reduce interest rates on government small-savings schemes with the objective of forcing banks to reduce deposit and lending rates. Beyond a point, there could well be a “savers’ revolt” with adverse impact on the macro economy and the government could well face a massive backlash. The government would do well not to yield to selfish sectional interests.

Commission on inflation

There is strong advocacy for the view that as inflation has been totally brought under control, the fisc can afford to be expansionist. This is a misleading line of reasoning.

The Consumer Price Index (CPI) for certain categories shows an annual increase of 10 per cent and it would be dangerous to frame macro policies on the premise that inflation has been licked. Inflation hurts the weakest segments the most and a government formally committed to inclusive growth cannot ignore the damage to the weakest segments.

I would reiterate my suggestion for the setting up of an independent High-Powered National Commission on Inflation. The Commission should be required to submit periodic reports on inflation as also inflation expectations and to recommend pre-emptive measures to the government — RBI.

Assocham has also recommended the setting up of such a Commission. Serious commitment by the government to set up such a Commission would be the best barometer to judge whether the government is serious in its commitment to usher in a Just Society.

(The author is an economist. blfeedback@thehindu.co.in)

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