Above all, a responsible Budget

A politician looks forward only to the next election. A statesman looks forward to the next generation. — Thomas Jefferson

The dog squad of the security staff of Parliament sniffed the parcels of the Budget documents to be distributed among members. No explosive materials were detected therein. It was symbolic. There were no big-bang proposals in the Budget presented by the Finance Minister.

The Economic Survey gave an inkling of the stance in taxation when it said that it was much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly. Higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.

Tax Net and Tax Base

My only caveat is that the term ‘tax base’ has been used in the common man’s lingo and not as understood in the technical literature on public finance. ‘Tax net’ is a more appropriate term than ‘tax base’ to refer to bringing more people under the tax umbrella. The technical meaning of ‘tax base’ is the basis on which it is levied, viz., income, wealth, capital gains, etc. Since the term ‘tax base’ has been consistently used by Government and even some experts wrongly, I did not expect that there would be any introduction of a new base like the inheritance tax.

Semantics apart, to follow up the suggestion of the Economic Survey, the Finance Minister should have withdrawn the exemption for dividends and financial assets at the hands of the individual for income tax and wealth tax, respectively, subject to certain limits. (There is, however, a proposal to raise the dividend distribution tax from 5 to 10 per cent.)

Except in the case of Service Tax, there is no indication of the manner in which the Government proposes to bring more people under the tax net. There are nearly 16,700 vacant posts in the Income Tax Department and 68,000 cases with an underlying amount of Rs 2.32 lakh crore in tax litigation, as on March 31, 2011.

Macro Impact

While there could be a sectoral analysis of the impact of the Budget, a macroeconomist is concerned with what would be the result on employment, output and income at the national level. The emphasis on investment as an engine of growth is right. For making a judgement on its impact on growth, one needs to wait for the detailed analysis of the Budget figures to know the net investment expenditure.

An entrepreneur’s decision to invest depends on his expectation of the demand for his products. He will undertake maintenance expenditure only if he expects the current demand for his goods to be sustained. He may undertake additional investment if he anticipates additional demand for his products due to additional incomes and growth in population, changes in tastes and preferences, all of which lead to a shift in the demand curve.

The problem facing him today is the fall in effective demand externally and internally. External demand has been adversely affected due to recession and the fall in incomes. The steep depreciation of the rupee has not helped exports. On internal demand, I have been arguing that, despite the rising incomes and the declining levels of poverty, demand has fallen because of the high level of prices that the aam aadmi or aam aurat cannot afford.

It has led to a decline in demand. This is what an economist would call a movement from a higher to a lower position in the demand curve, in contrast to its shift referred to earlier.

Yet, in all the official discussions, there is no recognition of the level of prices as the damaging factor. Instead, emphasis is placed only on the rate of inflation. If a pair of decent shoes costing Rs 1,500 goes up in price by 5 per cent (the official benchmark for the tolerable core inflation) what difference would it make to a consumer’s decision not to buy? There is nothing in the Budget that would provide some relief on the inflation front.

A Small Mercy

Despite what one may say about the inadequacies of the Budget to tackle current economic problems in a decisive way, in the foreseeable future one has to admire the Finance Minister for not taking the easy route of goodies and freebies in perhaps his last Budget before elections. Whatever proposals he has made would be justifiable in their own right in any year. Those relating to infrastructure and human resource development, social welfare, indexing bonds to inflation, incentives for housing and investment are all in the right direction.

The surcharge on 42,800 persons earning more than Rs 1 crore of taxable income may not fetch any large-scale revenue since most of the assessees would be deriving income from dividends. The rise in duty-free exemption of gold imported by passengers is hard to understand. It may become an avenue for benami imports.

One can assess the claim on containing the fiscal deficit at 5.2 of GDP in the current year only after seeing whether there are off-balance sheet items such as oil, food and fertiliser bonds and outstanding liabilities on account of unpaid bills. The additional resource mobilisation through tax revenue is only Rs 18,000 crore, a small drop in the ocean of fiscal deficit. Can the Finance Minister contain the fiscal deficit to 4.8 per cent of GDP next year, as promised?

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