Budget 2002-03: Results of Missing
an Opportunity

Mar 4th 2002, C.P. Chandrasekhar & Jayati Ghosh

In an implicit defence of the Budget proposals for 2002-03, Revenue Secretary S. Narayan attacked the corporate sector for failing to deliver. Speaking to representatives of the Confederation of Indian Industry during a post-Budget interaction, he argued that unlike last year when the budget provided Rs. 16,000 crore in the form of “giveaways”, this year’s budget offers none, because of the lack of resources resulting from the poor performance of industry. Industry’s failure to deliver, according to him, had in fact forced the government to impose additional taxes on the middle classes. “The corporate world must understand that this year the middle class is bearing your burden,” he is reported to have said.
This candid assessment of differential contributions made and burdens borne by different sections is likely to have been inspired in the main by two factors. First, it was possibly triggered by disappointment with the adverse response of industry and finance in and through the media. That response would only serve to strengthen resentment among sections adversely affected by the surcharge on income taxes, reduced tax concessions for savings, higher LPG and kerosene prices, hiked sugar prices, enhanced postal and rail tariffs and increased excise duties on items of mass consumption. Through these means the Finance Minister has after all mobilised a significant amount of resources over a full year.
Second, the response was possibly driven by the government’s own shock with the shortfall in revenues in 2001-02 relative to what was budgeted for. As Chart 1, shows the shortfall in gross tax revenue in 2001-02 relative to what was budgeted for amounted to a whopping 30,000 crore or 13 per cent of the budgeted figure. The shortfall occurred in all major taxes (corporation and income taxes and customs and excise duties). However, there were significant differences in the extent of the shortfall, which amounted to 9 per cent in the case of excise, 12 per cent in the case of income tax, 15 per cent in the case of corporation tax and a huge 21 per cent in the case of customs tariffs. As a result of the last of these, customs duties collected in 2001-02 were 9 per cent less than actual collections in 2001-02.
Chart 1 >>
The shortfall in revenues has meant that the post-liberalisation trend of a decline and subsequent stagnation of the tax-GDP ratio has persisted (Chart 5). Combined with the government’s obsession to keep the deficit under control, irrespective of the supply situation in the economy, and despite the government’s accelerated effort to garner resources from disinvestments, this has substantially reduced its ability to stimulate the economy. In year’s of recession this contributes to a worsening of the fiscal position of the government.
Chart 5 >>
In fact, the differentials in the extent of the revenue shortfall in the case of different taxes do suggest that the shortfalls in revenue generation in 2001-02 occurred because of a combination of reduced tax rates and the industrial recession. It is known that over the liberalization years the area in which the most substantial reductions have been made in taxes is customs duties. It was presumed that these reductions would be accompanied by a burgeoning of trade, resulting in increased rather than decreased customs revenues. The huge shortfall in customs duty collections reflect the fact that the expectation that duty reduction would be accompanied by an increase in trade volumes has been belied. If in addition trade growth tends to slow for external reasons, tax collections collapse, as happened in 2001-02.

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