Pre-Budget Manoeuvres

Feb 20th 2002, C.P. Chandrasekhar

The annual ritual in which the Finance Minister meets representatives of different sections of society to elicit their views on the direction the annual budget of the Centre should take has begun. So have the pre- and off-budget manoeuvres through which the government seeks to garner "revenues", so as to window dress the budget. The aim of that exercise is two-fold. First, to accelerate revenue generation during the last few months of the financial year, so as to ensure that the deficit on the budget for the current financial year is not far too high relative to the target set in the budget presented the previous February. Second, to ensure additional revenue inflows through off-budget measures in the coming year so that the budget, which receives much attention, can be shown to be les severe.

The need to resort to such measures this year is even greater. Figures relating to the first nine months of fiscal 2001-02 (April-December) indicate that tax revenue collections at, Rs. 126,390 crore are 2.5 per cent below that recorded in the corresponding period of the previous year. That is, instead of rising overtime to meet growing expenditures tax collections are falling in nominal terms, though GDP has been rising, even if less than expected. The fall would have been larger but for the fact that personal income taxes and excise duty collections have grown relative to the previous year, because corporate tax collections have fallen by an estimated 4.2 per cent during the April-December period.

This differential in performance across different kinds of taxes has a story to tell. It is no doubt true that sluggish revenues are in substantial part due to the recessionary trends being experienced in the industrial sector. But if recession alone were responsible, then the trend in excise duty collections should have also been more adverse. The fact that they have risen while corporate tax collections have fallen, points to the fact that the government’s penchant for offering more concessions to the corporate sector, especially in the form of exemptions and deductions, and only partly neutralising it with enhanced excise duty imposts, has also played a role.

In the event, unless the government resorts to alternative measures, the revised revenue and fiscal deficit figures for 2001-02 would be far higher than what was budgeted for. Some of these measures, such as treating the "profits" of the Reserve Bank of India as revenues are now past practice, so that unless these figures are inflated to levels well above what was budgeted for, they cannot resolve the problem. To deal with the special difficulties being faced this financial year, the government has opted for three alternatives, two of which are being implemented and the third being prepared for. First, the government has accelerated the pace of privatisation, which is being pursued in large measure as a revenue generating mechanism, though it has been couched in the rhetoric of reform. Over the last few months the process of strategic sale or divestment of control of public sector units for a small price has been sought to be pushed through, with much success in some cases such as a set of ITDC properties and great disappointment in other cases such as the airlines industry. However, with the programme of accelerated privatisation still on the agenda it is likely that the government would garner a significant sum through this route, even if at the cost of underpricing public assets in distress sales aimed at garnering revenues.
 
The second initiative being adopted is to transfer to the government’s budget the cash reserves being held by successful and profitable public sector companies, by paying out astronomical dividends. This is being adopted wherever the process of privatisation has been delayed despite the government’s effort. A few thousand crores have been transferred from VSNL alone this financial year. The government’s claim is that such transfers are necessary prior to privatisation, since these reserves are a reflection of revenues foregone for the government as shareholder of the enterprise concerned. But since, many of these companies have a sizable private shareholding because of partial and piecemeal divestment in the past, the beneficiaries of the high payouts would include those private parties who acquired a share in equity in the recent past. There is no reason why these shareholders should be paid out a sizable chunk of reserves, because they were the first off the block, especially when the justification for high dividend pay outs is that those acquiring equity through the imminent privatisation have no rightful claim on these reserves. Moreover, if these companies have accumulated these reserves over time because of their profitability, and if private buyers where willing to buy their equity despite the tendency to retain a substantial part of profits, there is no reason why they should not continue to operate under public management, with provision for higher dividend payments to the government in the future. There is little doubt that if the companies concerned are allowed to use their reserves for modernisation and expansion, they would be able to sustain their favourable track record. It is only the desperation to garner additional revenues that seems to be driving the government along the route of "reserve-farming", which has as its consequence the wilful destruction of even the viable segment of the public sector.

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