Despite
periodic statements to the contrary, the annual budget
of the Government of India is a major instrument of
its economic policy. It reveals the fiscal stance
- expansionary, neutral or deflationary - of the government
at each point in time; it reflects its economic policy
priorities; and it discloses the way in which the
burden of financing the pursuit of those priorities
is sought to be distributed. To these features characteristic
of all budgets must be added the special nature of
Budget 2004-05. Coming as it did in the wake of what
to many was a surprise election verdict against the
NDA and its economic policies, this budget was expected
to mark a departure from the neo-liberal economic
regime of the 1990s that had resulted in agrarian
distress, near-stagnant employment growth, inadequate
progress in poverty alleviation and a sharp increase
in urban inequality.
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The first impression is that Finance Minister P. Chidambaram
has responded to the election mandate for a redirection
of economic policy. Part A of his budget speech is
peppered with copious references to agriculture, education,
health and employment, even if the financial allocation
for many programmes under these heads amounts to mere
tokenism. In addition, he has made a special allocation
of Rs. 10,000 crore for the Planning Commission to
implement the National Common Minimum Programme (NCMP)
of the UPA.
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To finance these commitments, he appears to have made
some efforts at resource mobilization as well. He
has stuck by the promise made in the NCMP to impose
a 2 per cent cess to mobilise about Rs. 4,000 crore
for education. He has imposed a tax, even if only
a marginal 0.15 per cent, on stock market transactions.
He has increased the service tax from 8 to 10 per
cent and extended its reach by adding a number of
sectors to the 58 already being taxed.
While all these can be seen as positive steps forward
in redeeming election promises and fulfilling the
election mandate, a close look at the budget results
in disappointment. To start with, the new government
has chosen not to depart from the macroeconomic framework
typical of the pre-existing neo-liberal regime. As
the Economic Survey had noted, India's food stocks
are still at relatively comfortable levels; it has
access to an embarrassingly high reserve of foreign
exchange; and industry is characterized by substantial
excess capacity. This offers an opportunity to launch
an expansionary fiscal programme, which, if focused
on investments in irrigation and the infrastructural
areas, can result in output and employment growth
and help raise savings and government revenues that
can partly finance the expenditure undertaken to realize
that expansion. However, accepting the irrational
constraints on fiscal policy set by the Fiscal Responsibility
and Budget Management Act, the Finance Minister has
chosen to limit the fiscal deficit at 4.4 per cent
of GDP.
The result of this fiscal conservatism parading as
fiscal prudence is that the aggregate expenditure
budgeted for 2004-05 is, at Rs.4,77,829 crore, more
or less the same as the Rs. 4,74, 255 crore spent
in 2003-04. Since plan expenditure is budgeted to
rise by Rs. 24,000 crore, from Rs. 1,21,507 crore
to Rs. 1,45,590 crore, the Finance Minister has had
to budget for an almost equivalent reduction in non-plan
expenditure from Rs. 3,52,748 crore to Rs. 3,32,239
crore. This has been ensured through a huge reduction
of budgeted capital expenditures on the non-plan account
from Rs. 67.946 crore to Rs. 38,589 crore, which has
not been matched by the increase in plan capital expenditures
from Rs. 43,421 crore to Rs. 53,747 crore. In sum,
the immediate casualty of fiscal conservatism is much
needed capital expenditure which would have helped
relax crucial supply constraints in the infrastructural
area, even while stimulating demand and ensuring growth.
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This limit on aggregate spending has been accompanied
by a huge increase in the defence budget. In a surprise
move, the government has chosen to allocate an additional
Rs. 16,700 crore for defence, by increasing the defence
budget from Rs. 60,300 to Rs. 77, 000 crore over the
financial year. This increase is surprising since
even the interim budget had provided for only Rs.
66,000 crore for defence. Even granting that national
security is an important concern, this huge increase
in allocation seems unwarranted at a time when the
security situation can hardly be described as critical
and when problems such as an agrarian crisis, rising
unemployment and persisting hunger and malnutrition
are serious. In practice, the additional allocation
for defence exceeds the special allocation for the
NCMP, which sends out wrong signals about the priorities
of the government. And given the government's obsession
with the fiscal deficit, it is inevitable that this
increased allocation would have limited its expenditures
in other crucial areas.
The fall-out of this combination of fiscal conservatism
and largesse for defence is visible, for example,
in the reduced allocations for rural development and
employment. The total expenditure incurred by the
Ministry of Rural Development is estimated at Rs.15,061
crore in 2002-03 and Rs. 15,519 crore as per the revised
estimates for 2003-04. As compared with these figures,
the budgeted expenditure for 2004-05 is placed at
just Rs. 11,456 crore. What is more, this Rs. 4,000
crore reduction in expenditure relative to the revised
estimates for 2003-04 is largely on account of a sharp
fall in the allocation for rural employment programmes,
from Rs. 9,640 crore in 2003-04 (RE) to Rs. 4,590
crore in 2004-05 (BE). It could be argued that the
expenditure in 2003-04 was unusual, since it included
a Special Component of the Sampoorna Gramin Rozgar
Yojana (SGRY), aimed at augmenting food security through
food-for-work schemes in calamity affected areas.
But given the state of agrarian distress in most parts
of the country and the new government's stated commitment
to augmenting employment, the sharp fall in allocation
can hardly be justified.
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In fact, with the government having committed itself
through the CMP to guarantee 100 days of employment
at the minimum wage to one member of every needy family
in the country, a substantial additional allocation
for employment generation was expected. The government
could argue that employment being created with existing
expenditures in various sectors could be used for
the purpose of implementing the guarantee. But if
existing allocations were enough to realise this objective,
then there would have been no need for a special guarantee.
The view that the special allocation of Rs.10,000
core to the Planning Commission can be used to realise
this goal is also not defensible. The wage and capital
expenditures together required for provision of 100
days of employment for a single individual in a year
would total Rs. 9,000. Assuming that on average about
one-third to two-fifths of households in the country
would opt for such employment, the expenditure required
to implement the employment guarantee works out to
around Rs. 45,000 crore. Hence the additional allocation
of Rs. 10,000 crore for the CMP would be inadequate,
especially since a significant part of that allocation
would have to go to meet the expenditures on education
to be financed by the special cess that is expected
to yield Rs. 4,000 crore for the purpose. The budgetary
allocation for all levels of education is, at Rs.
11,062 crore, only around Rs.800 crore higher than
the expenditure in 2003-04, indicating that the allocation
aimed at raising over time the expenditure on education
from 3.1 to 6 per cent of GDP has yet to be made.
Funding for that purpose would have to come out of
the sum earmarked for the CMP.
Overall, therefore, the budget does not seem to have
provided the finance to meet the various commitments
made in the CMP and referred to in Part A of the Finance
Minister's speech. But the sense of disappointment
generated by the budget does not end here. Another
area of concern is the fiscal relationship between
the centre and the states. It has been clear for some
time now that urgent measures are needed to help the
states recover from the fiscal crisis they have been
in, especially since the implementation of the Vth
Pay Commission's recommendations. While an increase
in resource transfers to the states through an increase
in their share in taxes would have to wait for the
Finance Commission's recommendations, immediate steps
in the form of enhanced Plan and non-Plan grants and
a restructuring of their debt by swapping low-interest
debt for high interest debt was called for. In particular,
the practice of the Centre charging the states an
interest rate on their borrowing from the Centre which
was much higher than the interest rate paid by the
Centre on its own borrowings had to be reversed. However,
even while recognising the need to strengthen the
hands of the state governments, which must necessarily
play an important role in implementing the CMP, the
budget makes no major effort to correct the fiscal
squeeze being faced by the states. Much is made of
the reduction of interest rates paid by the states
on borrowing from the centre from 10 to 9 per cent.
What was not mentioned was that the Centre today borrows
in many cases at interest rates which vary between
4 and 6 per cent, and lends to the states at 10 per
cent.
Despite these measures to curtail its expenditures,
even if at the expense of the realisation of its stated
objectives and commitments, the government would have
had to mobilise additional resources to finance its
activities and meet its self-imposed fiscal deficit
targets. Some effort in this direction is indeed visible
in the budget: primarily, the imposition of a transactions
tax on financial transactions in equity and debt markets;
and, an expansion of the coverage in taxation in services.
While such moves have to be welcomed, their impact
has been marginal because of the extremely low rates
at which those taxes have been levied, the marginal
increase in coverage and the concessions in other
areas that have accompanied these measures in the
name of rationalisation of taxes. In the event, the
additional resources mobilised through the budget
is meagre, forcing the Finance Minister to fall back
on an unusual source of additional revenue, viz. recovery
of tax arrears due from cases where the tax claims
have not been legally disputed.
Arguing that there is a kitty of close to Rs.18,000
crore under this head and assuming that he would be
successful in mobilising a significant share of that
kitty, the Finance Minister has made extremely optimistic
projections of tax revenue collections under different
heads. Corporation taxes are estimated to rise by
41 per cent, income taxes by 27 per cent and excise
duties by 18 per cent. If these targets are realised,
the gross tax revenue to GDP ratio would rise by one
percentage point from 9.3 per cent in 2003-04 to 10.3
per cent in 2004-05.
There are no reasons whatsoever to believe that such
large additional revenues from taxes would actually
materialise. Hence, the final collections are likely
to be much lower than projected, forcing the government
either to reduce its expenditures even more than provided
for in the budget or to accept a much higher fiscal
deficit. Rather than lay himself open to that possibility
in the very first budget of the new government, Mr.
Chidambaram could have done better by making adequate
expenditure provisions, ensuring a higher level of
additional resource mobilisation and allowing for
a substantially higher fiscal deficit, given the context
of a demand constrained economy which makes that deficit
benign from the point of view of inflation.
The reason why the Finance Minister and his colleagues
did not choose that route seems to be their neo-liberal
mindset. In the event, inadequate moves on the development
front have been accompanied by policies that seem
to suggest persistence with the liberalisation agenda
of the previous government. Foreign Direct Investment
caps have been raised substantially in telecom, civil
aviation and insurance. Foreign Institutional Investors
have been provided a range of concessions in the form
of lower capital gains taxes, greater access to the
debt market and higher ceilings for their shareholding
in different sectors. Banks are to be encouraged to
increase their speculative exposure to the stock market.
And privatisation is to be persisted with in the name
of “piggy-backing” on new share issues by profit-making
companies like the NTPC.
Given the mindset these policies reflect, an adherence
to fiscal conservatism and the adoption of a market-friendly
taxation framework was inevitable. Unfortunately,
however, the nature of the mandate obtained by the
new government required it to depart from neo-liberalism
and redirect economic policy in favour of the poor.
Faced with this dilemma the Congress-led government
has made some moves that are suggestive of a new agenda.
But overall it seems to have adopted the soft option:
it has dressed the budget in pro-poor rhetoric but
chosen not to implement what it claims it has set
out to do.
