By now the country should be used to Finance Ministers who excel in the art of double speak, since that has been our fate for several years now. We can even recognise the possibility of double think, as Finance Ministers seem to believe in what they declare to be their goals, even as they institute actions which are likely to have the opposite effect. But this may be the first time that the Finance Minister's budget speech has been so full of "confusions and supple contradictions", that his own intent is simply not clear.

Despite the apparent confusion, of course, the actual impact that the budget is likely to have on the economy is clear enough, just as it is quite clear what fiscal strategy the economy really required in the current circumstances.

This has been a drought year, one of the worst in the past decade and more. Cultivators and agricultural labourers in many parts of the country are still reeling under the effects of that drought. The worst effects, in terms of loss of income and less employment, are going to be felt from now until the next kharif crop. Meanwhile, farmers continue to face volatile and falling prices because of trade liberalisation, even as their costs are going up.

The greatest need in the economy today is that for productive employment. The mismatch between available jobs and people who need work has never been so great. In such a situation, the task before the Finance Minister should have been clear. The most urgent requirements in the economy relate to the crisis in agriculture and the need to generate more employment, and the Budget should have addressed itself primarily to these issues.

Budget 2003-04 was therefore expected to be different from its immediate predecessors, and focus on rural India and the poor. This was also expected because the government is faced with elections in a number of states as a run up to the general elections next year. With large food stocks in the government's godowns and huge foreign exchange available with the RBI, the Finance Minister was expected to use the opportunity, by increasing spending on food-for-work programs aimed at creating rural infrastructure, which could have had positive employment and poverty-reduction implications However, Mr. Jaswant Singh has not met any of these expectations. Instead, the Finance Minister has chosen to go along the well-trodden path of furthering the interests of domestic and international large capital, while sacrificing cultivators and ordinary workers.

There are a large number of tax sops and fiscal concessions made to the middle classes and to large capital, especially that involved in producing consumer goods. There are also major gains for financiers, with the elimination of long-term capital gains tax in an effort to boost the sluggish stock market.

These measures have been instituted despite the trend decline in the tax-GDP ratio, which is discussed in more detail below, and the large shortfalls in tax collection in the current year, as shown in Chart 1. There have been significant shortfalls in most tax revenues, amounting to nearly Rs. 14,000 crore in the aggregate. Personal income tax collection has been 12.2 per cent less than anticipated, and corporation taxes and excise duties around 5 per cent less.
Chart 1 >>

These could have been blamed on the domestic recession, but for the fact that the only taxes to exceed the budgeted amount were customs duties, indicating that at least import demand remained buoyant. Inadequate enforcement in the context of lower tax rates, remains the single most important factor behind low tax collection.

The Finance Minister spoke for a long time about the importance of reviving agriculture in his Budget speech. But despite all the fine words, the Budget has almost nothing positive to offer rural India. Total central plan outlay for agriculture and allied activities along with rural development, will be reduced by more than Rs. 4,000 crore, from Rs. 16,053 crore to Rs. 12.047 crore. The argument here is that there was additional expenditure over the past year because of drought relief work – but in fact the most crucial need for drought relief may be now, in the next few months, as the lean agricultural season stretches the survival strategies of those already affected by the poor monsoon.

Instead of alleviating the problems of agriculture, the Budget actually makes conditions worse for most cultivators. Far from offering a package to aid the recovery from drought and help farmers cope with import competition, the Budget will contribute to increased costs of agricultural production.

The price of fertilizers will go up, (by Rs. 12 for a 50-kg bag of urea and Rs. 10 for DAP and MOP) at a time when already farmers are facing lower prices for most of their crops. In addition, there are large additional taxes and cesses on transport diesel, light diesel oil used for tubewell pumpsets, and crude oil. All of these will add both directly and indirectly to the costs of cultivators. Agricultural credit provision has all but collapsed, and the Finance Minister should realise that simply declaring  that such credit should be available at 2 per cent below the Prime Lending Rate is not going to help when banks are simply not lending to agriculture in the first place.

Instead of trying to encourage employment generation, the Budget attacks the small-scale industrialists who account for the bulk of manufacturing employment in both rural and urban areas. The reduction in customs duty, the dereservation of as many as 75 items previously reserved for the small sector, and the increase in some excise duties produced by small scale producers from 4 per cent to 8 per cent, will all affect this sector adversely.

In both health and education, the thrust of the Budget is to force people to use private providers rather than a reliable and efficient public service. There are various tax incentives and insurance schemes which are designed to make ordinary people more reliant on private business in both health and education.

State governments are the dominant providers of these basic services, as well as of rural infrastructure, and here the Finance Minister has been ungenerous. The move to VAT will make the States lose considerable tax revenues, and the Central government has only promised full compensation for one year, with 75 per cent and 50 per cent in subsequent years and nothing after that. The main increase in direct taxes (on personal incomes above Rs. 8.5 lakh a year) has come in the form of a surcharge that does not have to be shared with the State governments, rather than a rate increase that States would also benefit from.

A relief to States is that the Finance Minister has finally admitted to a long overdue need - to replace high interest debt by lower interest loans. In this context it is worth noting that interest payments by State Governments form over 17 per cent of the Central Government's revenue receipts. In the current year these amounted to Rs. 40,571 crore, substantially more than personal income tax and nearly as much as total corporation tax. The Centre profits from the very high interest rates it charges to States and, unlike its evident generosity to the corporate sector, it has so far been reluctant to bring these down to market levels.

However, the debt swap announced in the Budget is a very miserly corrective from the usurious Centre. It requires States to forego 20 per cent of their small savings collections, which are in any case likely to decline as result of interest rate reductions also announced in the budget. This will actually worsen the current cash-flow position of most States, with the adverse impact greatest in States such as West Bengal and Maharashtra that lead the nation in small savings collections.