Third, even the level of the interest rate paid on open market borrowing has been unduly high because of the regime of high interest rates that had been ushered in by reform. As the Finance Minister himself has stressed, real interest rates in India are extremely high by international standards. What he failed to mention was this was largely a 1990s phenomenon resulting from a monetary policy that kept interest rates high partly in order to attract foreign capital inflows in the wake of financial liberalization. If this had not been the case, the interest burden on the budget would have been even lower.
 
Finally, subsidies on food which were budgeted at Rs. 8210 crore in the budget for 2000-2001, have turned out to be close to 50 per cent higher at Rs. 12125 crore not because of the largesse of the government vis-à-vis the poor. Rather it is the result of the foolishness of the government in raising issue prices repeatedly to levels even higher than warranted by the increase in procurement prices, in order to reduce food subsidies. The net result has been a sharp fall in offtake from the public distribution system. As result, even in a year when foodgrain output growth has been low, the government has found itself saddled with huge and rising stocks, which increased its outlays on the costs of carrying these stocks. A wrong policy aimed at reducing subsidies has ended up bloating subsidies even further. But even here, it must be noted, despite this the total subsidies relative to GDP have not changed substantially in 2000-01, as Chart 4 illustrates.
Chart 4 >>
 
In sum, the argument attributing the fiscal deficit to a tendency for expenditures to ‘automatically' overshoot beyond that warranted by a given level of receipts does not wash. What has been responsible for the size of the deficit last year is a set of wrong policies and more crucially a fiscal strategy over time involving policies such as direct tax concessions and customs duty reductions, along with financial policies that have substantially raised the interest outlay in the government's budget.
 
The reason the Finance Minister seeks to ignore these aspects of the problem is not hard to find. Driven by the ideology of neoliberal reform, he wants to continue with the practice of handing out direct tax concessions, in the hope that this would spur growth. In this budget these concessions have not merely come in the form of the withdrawal of surcharges on income taxes, of 10 per cent in the case of corporates and 15 per cent in the case of non-corporates, without substituting them with other direct tax levies, but through several other measures. These include : a reduction on dividends distributed by domestic companies from 20 to 10 per cent; the exemption from taxation of capital gains from sale of securities and units so long as they are reinvested in primary issues of public companies; and the provision of a host of tax holidays to investments in a range of sectors varying from infrastructural areas, to ISPs and broadband networks and those involved in “the integrated business of handling, storage and transportation of foodgrains”. These, combined with other concessions, are expected to result in a revenue loss of Rs. 5,500 crore of direct taxes in a year. In addition, the drive to reduce customs tariffs even when they are below those specified in WTO commitments, is expected to result in a revenue loss of Rs. 2,128 crore.
 
These losses do not, however, bother Mr. Sinha. He has partly made up for them through an ostensible “restructuring” of excise duties aimed at moving to a single 16 per cent rate of CENVAT on all commodities. It hardly bears stating that a common rate of duty on commodities, varying from manufactured necessities like soap to luxuries like automobiles, is regressive by definition. Yet the Finance Minister's excise homogenization initiative has involved reducing duties on a range of luxuries varying from automobiles to refrigerators and increasing them to double their current ad valorem levels on many mass consumption goods. The net estimated effect is additional revenue mobilization to the tune of Rs. 4,467 crore from indirect taxes other customs duties.
 
However, the shift to a more regressive and inflationary taxation structure does not help cover the loss of revenue from direct taxes and customs duties. There are a number of ways in which the Finance Minister makes up for this debilitating fiscal strategy, in order to reduce the fiscal deficit to 4.7 per cent of GDP while maintaining a stable expenditure to GDP ratio. First, he plans to squeeze capital expenditures. As Chart 5 shows, the ratio of non-defence capital expenditures to GDP has fallen sharply in the last two years and is budgeted to remain at that level in the coming year. Second, he believes that tax buoyancy and voluntary compliance will increase tax revenues by more than 14 per cent next year. Third, he provides for a record Rs. 12,000 to be garnered from disinvestments of equity in public sector corporations. Fourth, he has chosen to reduce interest rates on small savings schemes by a large 1.5 percentage points so as to reduce the interest paid by the government on such savings. Finally, he has decided to revamp the pension scheme so as to reduce the outgo on pensions in future. It takes little to judge who gains and who loses from these initiatives.
Chart 5 >>