Budget 2005-06: Marking Time

Mar 7th 2005, Prabhat Patnaik
The rhetoric of the 2005-06 budget certainly shows a welcome change from earlier. Previous budget speeches had been pre-occupied with showing the need for neo-liberal reforms and how the particular budget being presented was carrying forward that process. The 2005-06 budget by contrast talks of the rural sector, employment generation, the revival of the agricultural sector, infrastructure, public investment and social sector expenditure. And it also makes certain provisions in these directions. These to be sure are far short of what the Left had asked for in its Memorandum submitted to the Finance Minister, but there is no gainsaying that the Memorandum appears to have left an imprint on the budget.

At the same time however this budget does not provide an occasion for celebration. It does not mark any change of course away from neo-liberal reforms. On the contrary many of its suggestions like opening up the mining and pension sectors to direct foreign investment, encouraging crop diversification at the expense of foodgrain self-sufficiency, dismantling the existing foodgrain procurement mechanism in the name of ''decentralizing'' it, the reductions in customs duties on a range of capital goods, not to mention the significant cut in corporate income tax rate from 35 to 30 percent on domestic capitalists, are all measures prompted by the neo-liberal outlook which have serious adverse implications for the economy. And when one adds to this the pronouncements of the Economic Survey on capital account convertibility and on ''labour market reforms'' (which mean in effect the wholesale institutionalization of the right to retrench), the recent pronouncements of the Prime Minister virtually endorsing the ''India Shining'' slogan of Mr.Advani (''The sceptics of Reforms have been proven wrong''), and the announcement of 100 percent permission for direct foreign investment in the construction sector through the ''automatic route'', it is clear that no change of course is being contemplated. Indeed let alone a change of course, we cannot even be sure that the promised relief to the poor, notwithstanding its comparative meagreness, would actually be implemented. This is because the budgetary arithmetic is quite clearly and quite seriously flawed.

The first thing to note is that the budget's contribution to the Central Plan, which is supposed to go up in the aggregate from Rs.82529 cr. in 2004-05 (RE) to Rs.110385 cr. in 2005-06, shows an increase from Rs.8589 cr. to 11,494 cr. under rural development (under which employment programmes fall). But the actual figure for 2002-03 was Rs.11939 cr. and for 2003-04 Rs.11369 cr. In short, the budget support for rural development which had gone down last year is being raised back to the level that had prevailed in the preceding two years (which straddled a drought that forced even the NDA to enlarge employment programmes). The increase therefore is not much to write home about. True, the increases under social services, which include education and health, are more substantial, as is the overall increase, but the view that the budget constitutes a major step towards expanding rural employment is untenable.

Let us, for argument's sake however, forget about budget support as such. Let us just look at the total outlays. Here we find that the total Central Plan outlay on the Department of Rural Development is supposed to increase from Rs.13866 cr. in 04-05 (RE) to Rs.18334 cr., and within this the total outlay on rural employment from Rs.6408 cr. to Rs.9000 cr. (The Finance Minister in his speech mentions a much larger figure but we shall come to that later). This however is composed of two elements: an increase of Rs.3582 cr. under the Food-For-Work programme (FFW) and a decrease of Rs.990 cr. under the Sampoorna Grameen Rozgar Yojana (SGRY). Since FFW covers only 150 districts, the conclusion is inescapable that the government is scaling down employment programmes in the remaining districts of the country to accommodate FFW, which is a disturbing retreat from universality to district-wise targeting!

The Finance Minister of course can cite one extenuating factor, namely that in the Expenditure Budget the foodgrain component is not included, unlike in earlier years, and if the foodgrain component is included then the FFW expenditure comes to Rs.11000 cr., the figure he gave in his speech (as opposed to Rs.5400 cr. as given in the Expenditure Budget). But then it is not clear why the foodgrain component is excluded from the budget and what it means in terms of the real provision of foodgrains. In any case the argument about the implicit narrowing of the Employment programme through the backdoor introduction of district-wise targeting remains valid.

What is immediately intriguing about the budget is the fact that the Finance Minister appears to have given out substantial tax concessions all around and yet managed to increase the Gross Budget Support for the Plan by 16.9 percent over the previous year (BE to BE), and the Budget Support for the Central Plan by 25.6 percent, even while ensuring a marginal reduction in the fiscal deficit to 4.3 percent of the GDP. For a government that till the other day kept asking ''Where is the money?'' when any worthwhile proposal was mooted, including a universal EGA as promised in the CMP itself, this is a remarkable turnaround. Suddenly there seems to be an abundance of resources available for being doled out. How has the Finance Minister answered the question which he himself, not to mention the Prime Minister, has been in the habit of asking of late: ''Where is the money?'' The simple answer is: through substantial ''window dressing'', both in the matter of the expected tax revenue and in the matter of the expected fiscal deficit.

With the reduction in corporate tax rate, with the removal of a large number of service providers from the purview of the service tax, with the lightening of the income tax burden, with the reduction in customs duties on a large number of items, especially capital goods, and with significant concessions in the excise duties on several items, the Finance minister's claim that his indirect tax proposals would be broadly revenue neutral and that his direct tax proposals would garner Rs.6000 cr. extra appears entirely untenable, notwithstanding the 50 paise cess on petrol and diesel (on which more later) and the slightly heavier taxation on cigarettes, gutka etc. But let us take his word on this. Even then the tax revenue calculations appear grossly unrealistic.

Even if we assume a 9 percent growth in real terms of the non-agricultural sector during 2005-06, and a 6 percent rate of inflation, the nominal growth rate of this sector comes to 15 percent. At existing tax rates the total tax revenue cannot be expected to increase at a rate much higher than this. Since we are taking the Finance Minister's word that additional tax revenue mobilization is a small Rs.6000 cr. it follows that total tax revenue should increase at around 15 percent. Instead we find an expected tax revenue increase, compared to 2004-05 (RE), of 21 percent. This is a gross overestimate, much like what was made in the last year's budget, because of which last year's tax revenue receipts show a shortfall of Rs.11000 cr. in the RE compared to the BE. A similar shortfall is bound to arise in the current year as well. When we add to this the fact that the Finance Minister's claim of revenue neutrality of his indirect proposals and of a small net gain from his direct tax proposals is quite untenable and that notable tax revenue losses are likely on both fronts, it is clear that the shortfall may be even larger.

This would not matter so much if the government's hands were not tied by the Fiscal Responsibility and Budgetary Management Act, an utterly silly piece of legislation supported alike by the Congress and the BJP, according to which in the event of the fiscal deficit during any year exceeding a certain threshold the government is duty-bound to cut back expenditures. While the Finance Minister has liberated himself from its yoke when it comes to the overall fiscal deficit figure, as long as the Act is on the statute books he is bound by this ''during-the-year'' rule. Hence if tax revenues show greater sluggishness than anticipated in the budget, the expenditure targets would not be met, in which case even the budgeted increases on the social sector and rural development would not be realized.

The second area of 'window-dressing' is with reference to the fiscal deficit. There is a substantial ''off-loading'' of borrowing from the budget to off-budget entities. At least three deserve mention. The first is State governments. The Budget documents show what at first glance appears a rather surprising reduction in total capital expenditure, and correspondingly in the Gross Budgetary Support for the Plan. Plan Expenditure for instance falls from Rs.145590 cr. last year to Rs.143497 cr. this year (BE to BE). The Finance Minister however claimed that the GBS (on a comparable definition to what was used earlier) would be Rs.172500 cr. for 2005-06. The reason for this discrepancy lies in the fact that following the Twelfth Finance Commission's report, State governments would be borrowing around Rs.29000 cr. for their Plans from the market. Earlier the Centre would have borrowed this amount and handed it to the States, but now the States themselves would have to go the market.

This represents of course an offloading of the fiscal deficit from the Centre to the States. In addition it is fraught with potentially serious consequences. States may not be able to get the loans at reasonable terms, especially in these financially ''liberal'' times (when even the captive market for government and government-approved securities provided by the Statutory Liquidity Ratio is being abandoned according to this year's budget); some states may not be able to raise their loan requirements from the market at all. True, the Centre which earlier had the sole prerogative of market borrowing charged the States exorbitant rates on the loan proceeds it made available to them; but the solution to that lies in regulating the rate at which the Centre can lend to the States (pegging it for instance at certain fixed percentage points below the average nominal growth rate of the GDP) rather than having the States borrow directly from the market which could even be a prelude to the fracturing of the nation's unity (if States started borrowing freely from international agencies).

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