Some
newspapers have already made much of the recent data
released by the Finance Ministry on the central government's
finances for this year. These suggest that the revenue
deficit is already much higher than it should be given
the target for the full fiscal year - indeed, for the
first five months of the year, from April to September,
the revenue deficit has already reached 83 per cent
of the budget target of Rs. 76,171 crores for the full
year.
This
means that unless the central government is able to
increase receipts quickly, or cut down on its expenditure,
the revenue deficit is likely to be well over its target
in the current fiscal year. This has already given rise
to fears of new taxes being imposed upon common people
in the immediate term, and of inflationary pressures.
But there are reasons to be much more cautious in interpreting
these recently released figures. First of all, it was
only to be expected that the revenue deficit would be
larger than projected, because the budget itself had
what is generally accepted to be an excessively optimistic
perception of the likely deficit. This was made through
very large (and generally unwarranted) expectations
of increases in tax revenues.
During the presentation of the Budget, the Finance Minister
had justified these exceptionally large expectations
of tax buoyancy (to the tune of more than 20 per cent
increases in some direct taxes) on the grounds of greater
enforcement, collection of corporate tax arrears (some
of which have remained unpaid for decades) and the like.
It was fairly obvious to most observers that these Candide-like
expectations were most unlikely to be met.
And this is more or less what has happened, thus far
at least. Tax revenues thus far are less than 24 per
cent of the budgeted annual total, and the net tax revenues
of the Centre are less than 20 per cent of the budget
amount. In such a context, it is hardly surprising that
the revenue deficit is already much higher than anticipated.
In fact, revenue expenditures have been restrained -
some would say overly restrained given the requirements
created by poor early monsoon rainfall and the many
commitments of the new government. Total revenue expenditure
has been around 34 per cent of the total amount budget
for the year, and of this the major element has been
for subsidies. (Incidentally, capital expenditure has
been even lower, and thus far only 28 per cent of the
budgeted amount has been spent.)
So, the current inability to meet budget projections
does not stem from any fiscal profligacy on the part
of the government - rather, it reflects the excessive
optimism and lack of realism of the budget estimates
themselves.
That being said, what are the implications of a larger
revenue deficit? Under normal conditions, it would not
really matter very much, and if it were the case that
such a deficit reflected increased expenditure directed
towards the poor or towards revising the rural economy,
it would even be welcome. But we have already seen that
it does not reflect increased expenditure, but rather
the inability to meet the inflated tax revenue targets.
This is a problem in the current situation because of
the government's commitment to the Fiscal Responsibility
and Budget Management (FRBM) Act, an extraordinarily
foolish piece of legislation which the new UPA government
chose to notify as one of its first actions. The FRBM
Act not only announces very rigid targets for the revenue
and capital account deficits of the government, it also
specifies conditions that have to be met within the
fiscal year.
The notification spells out that in case the central
government does not meet 40 per cent of its revenue
target within the first six months of the year, it must
start cutting back on expenditure to ensure that the
overall deficit is contained. The Act also prohibits
the use of deficit financing, or the printing of money,
to meet the deficit. This prevents the government from
increasing necessary and important expenditures (for
example on rural employment schemes, on agriculture,
on health and education).
So the current fiscal situation is a source of concern
only because it is likely to prevent the central government
from undertaking expenditures which are necessary to
fulfil its own promises, and may even cause it to cut
back on some expenditure. In the current context, this
in itself is not a source of inflation, which is currently
being driven by cost-push factors that are both national
and international in origin.
What can the government do about this situation? The
most obvious answer is that it needs to increase tax
revenues. This does not necessarily imply - as had been
implied in some newspapers - that tax rates have to
be increased or that new taxes have to be imposed on
the common people. Rather, the government should actually
get serious about recovering the tax arrears and enforcing
greater compliance, as it has promised.
And there are other taxes, including some which were
originally proposed in the budget, which should still
be reconsidered. The most blatant example is the stock
markets transactions tax, which was an extremely small
but important measure (involving a tax rate of only
0.15 per cent on turnover). Even this small tax has
been substantially diluted as the government caved in
to the pressure imposed by a handful of Dalal Street
brokers, and it is estimated that more than Rs. 3,000
crores of potential tax revenues were foregone in the
process.
At the same time, the capital gains tax was removed,
so that effectively financial speculators are today
taxed less than they were before, which is completely
unjustifiable. Now that there is a sense of fiscal stringency,
such taxes must immediately be re-imposed. In addition,
other taxes can be considered, such as a Tobin tax on
cross-border transactions, which would operate to curb
the openly speculative movements of finance that have
become so marked in India especially in the recent months.
All these are eminently possible, but only if the central
government is serious about fulfilling the promises
that it made to the people in the aftermath of the electoral
mandate.
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