Debating India

WHAT IT MEANS

Sunshine In A Briefcase

Monday 19 July 2004, by SHASTRI*Paromita

Seven years in political wilderness and he’s lost none of his touch. The gentle tug of the CMP was all over, but PC does a nifty blend of fiscal fitness and social therapy.

The whiffs of disappointment were too strong to ignore. They poured out of confused industry leaders, tax experts and instant analysts and were mirrored in the sharp dip in share prices.

It was, after all, poster-boy-for-change Palaniappan Chidambaram’s return to the hot seat after seven years, backed by no less than the father of consumer liberalisation, Manmohan Singh. And the mandate had indeed been for change. The reformist face of the country justly expected fireworks.

But PC’s third budget has paced out the crackers as well as the money, and may even end up-eventually-yielding more bang for the bucks. For, it has "shifted gears" for long-term growth, laying out a framework to distribute the fruits of that growth to those untouched by the prosperity of recent years. It has put huge sums of money in the hands of the Planning Commission and the states to invest in building the social superstructure. And it has gone all out to promote investment in crucial infrastructure to give that growth. In as much as a budget speech announcing a new investment commission can woo foreign investors, that is.

Industry’s thumbs-up came with three good reasons. For most, it was a huge relief that the budget, even within the CMP straitjacket, remained true to the second phase of reforms. Secondly, many admitted that they had indeed feared the worst-huge giveaways, yawning budget gaps. SRF’s Arun Bharat Ram and MUL’s Jagdish Khattar weren’t expecting any sops, and so were indifferent to the absence of any. RPG Enterprises vice-chair Sanjeev Goenka went a step further and said: "It’s high time we stopped going to North Block with a begging bowl." All they wanted was infrastructure and a climate to invest.

And they got that. A "daring and caring" budget, as PC himself described it. Plus, there was icing on the cake in the form of sharp hikes in foreign direct investment limits in telecom (74 per cent), aviation and insurance (49 per cent each) to entice foreign funds and expertise to Indian shores. And a quietly-hidden disinvestment outlay of Rs 4,000 crore-when most expected zero-from expected equity sale in NTPC, Maruti Udyog and Balco. A beaming R. Sheshashayee, MD, Ashok Leyland, said: "The bold ideological statements at the macro level were unexpected. The increase in FDI cap, dereservation of 85 SSI items, and the customs duty reductions are brave policy statements. This does not just give fish to the hungry, it also talks of capacity building and development." Even the Left leaders, though vociferously protesting the two moves, seemed not unduly worried at the sudden turn of events.Thirdly, who would quibble with the concessions for the farm sector and rural India? As well as for the uneducated and undernourished?

Not industry. Cheaper credit, easier insurance, better health and wider education will deepen rural consumption and increase the demand for its products, which has seen pockets of stagnation in recent times.

The thrust on agro-processing will hopefully create jobs to accelerate that demand. As the prime minister said, commending the budget: "A meaningful solution to the problem of mass poverty, ignorance and diseases afflicting millions of people can be found in the framework of rapidly expanding economy. And the budget aims to combine the rapid economic growth with enhanced social equity."

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Education The two per cent cess is imposed on all taxes. Each one of us will now pay to build the outlay of Rs 5,000 crore towards education and mid-day meals in 2004-05.

Pay for development

Can you quarrel with that? No, especially when the entire country is collectively contributing to that growth. Each one of us will now pay to build the Rs 5,000-crore education and midday meals outlay. The expected two per cent cess is imposed on all taxes-personal income, corporation, excise, customs and services. You pay the cess when you earn a salary or when you buy a five-star hotel dinner or even a matchbox.

There’s the small consolation of a rebate that effectively raises IT liability to above Rs 1 lakh, thus letting out 1.4 crore taxpayers. But, for the rest of the taxpaying public, the cess-induced higher tax burden of 10.2 per cent, 20.5 per cent and 30.6 per cent on the three slabs is not the only bad news. Contrary to what the North Block bureaucracy would like us to believe, all products and services will also become costly thanks to the cess on excise, customs and services tax. The hike may be marginal on cheap products, but will hit the pocket in the case of high-value items like, say, cars. Maruti, for instance, raised prices barely hours after the budget, making their vehicles costlier by Rs 792 to Rs 2,153 ex-showroom.

There’s yet another two per cent extra burden on Indians using services-service tax rate has gone up from 8 per cent to 10 per cent. The tax net has also widened to include new services like pollsters-sweet revenge, Mr Chidambaram?-which along with the cess is contributing Rs 4,140 crore to the total services revenue of Rs 14,150 crore, or Rs 1,150 crore higher than what Jaswant Singh expected in his interim budget.

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Water Over Rs 20,000 crore allocated to irrigation projects, restoring water bodies, and flood control. NABARD to lend money on easy terms for water harvesting schemes.

As a result, tax revenue itself has given PC all he needed to fund the benevolent and steep 20 per cent rise of Rs 24,083 crore in plan expenditure over the revised figures of last fiscal. As well as the long-overdue hike in defence capital expenditure-this time it has more than doubled to Rs 33,483 crore. Thus, the net central revenues target is up by 25 per cent, or Rs 46,367 crore over the revised figures, and has helped fund the drop in capital receipts that’s mainly due to disinvestment proceeds coming down from Rs 16,000 crore in the interim budget to only Rs 4,000 crore. According to expenditure secretary D. Swarup, the year’s programme comprises an IPO of five per cent equity from NTPC and the disinvestment of remaining government holdings in MUL and Balco.

5 per cent! (Outlook, July 4 issue had said as much and quoted North Block officials that the fiscal rectitude would surprise many!) PC says that his hands were tied by the Fiscal Responsibility and Budget Management Act that was notified recently but it was probably more Manmohan’s fetish for a fighting-fit fisc.In keeping with the guidelines of the Act, he’s presented, along with the budget documents, a statement outlining the macro-economic climate and a medium-term policy statement.

And so it is that a major and historic move towards budgetary transparency is made.It’s clearly one of the best things in this budget and the mantle has fallen providentially upon PC again to be the trailblazer. (Remember, how he phased out adhoc T-bills and changed over from budget deficit to fiscal deficit in 1997?) The goals in this document as well as PC’s speech clearly say that quarterly reviews of the progress made will be presented in Parliament and that the suggested tax rationalisations of the Kelkar report would be attempted in the next budget. A clear tax roadmap does away with future uncertainty, the single-most negative factor in attracting investment.

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Agriculture Credit package for farmers, enhanced farm and cattle insurance, rural infrastructure fund, tax sops for horticulture and dairying, and impetus to agri-business.

Farm view

Beyond the ambitious tax effort, which PC says will come easily from huge "unrecovered undisputed arrears"-and he’ll launch a special drive to get that-the other big idea of the budget is agriculture. Explains chief economic advisor Ashok Lahiri: "This government’s focus is on agriculture and agro-industries. If these can grow at 7-8 per cent, we can find a solution to the employment issue."

The bonanza for the sector includes, apart from the credit package announced a couple of weeks ago, enhanced farm and cattle insurance, irrigation schemes, rebuilding traditional water conservation schemes, and tax concessions for allied activities like horticulture and dairying. He’s also promised improving agricultural product markets and promoting agri-business. Commercial banks, through their regional rural banks, have been given the task and the responsibility of doubling agricultural credit in three years, while government will take steps to revamp the cooperative credit system, the collapse of which has been the single biggest factor in the ruin of small farmers. A task force will submit its report on this by October 31. A bit of a burden-shift here on the part of PC.

In the matter of wooing the poor and the farmers, the budget follows the CMP faithfully, describing it as the "guiding light". Yet, there’s no blind faith. For instance, even after extension of the Antyodaya Anna Yojana to another 50 lakh families, food subsidy bill has gone up by only Rs 300 crore over the revised estimates for last fiscal to to Rs 25,800 crore. Better still, it talks about piloting a food stamp scheme in a few districts, assuming a state offers itself for experimentation. And while the Employment Guarantee Act is hammered out, there’s food for work in 150 most backward districts. This involves a central component, so states will be only too eager to comply.

It’s not as if the budget has made everybody happy, not even all the too-eager-to-please businessmen. Small brokers, even some corporates, are upset over the turnover tax and pulled down the Sensex by 115 points on July 8, even though the pernicious long-term capital gains tax has gone. Industry and analysts alike were also bewildered by the range of trifling exemptions given-not like Chidambaram at all. The most important question: far too many promises in a 29-page, 140-minutes long, 154-para speech-will delivery match up?

The proof of the budget thus will lie in its implementation.

And implementation, as PC said, will depend on the absorptive capacity of the sectors targeted, limited already by the short time left of the year. Thus, even as foreign investors seemed happy, rating agencies shied from shedding their reservations.Andrew Holland, executive VP (research), DSP Merrill Lynch, did emphasise that the FM "has maintained fiscal prudence and continued with disinvestment. This is what foreign investors wanted to hear." But Amit Tandon, MD, Fitch Ratings, warned: "The focus on increasing the flow of resources to agriculture and the rural economy is commendable but we caution that the process be guided by prudence and financial discipline if it is not to affect the asset quality in the banking system."

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Defence Defence capital expenditure has more than doubled to Rs 33,483 crore. This is needed to fund the purchases already contracted and pay the pending bills.

The same factor also troubled Moody’s Investor Services.Analyst Joan Feldbaum-Vidra rightly pointed out that the growth projections were ambitious, considering another good year was unlikely to be duplicated. Therefore, "we do not anticipate making any movements on India’s rating in the near term" pending assessment of the implementation of the budget and an analysis of the impact on the government’s financing capacity. She also said: "We are concerned that weaker-than-expected revenue performance combined with an ambitious social agenda could lead to an overshooting of the deficit target and a consequential rise in indebtedness. The planned slowdown in the privatisation programme will mean more recourse to expensive domestic debt creation." She warned that "downward pressure on the ratings would be exerted if we think the government’s debt ratios will deteriorate over the medium term."

And that wouldn’t augur well for a government hinting at a hardening interest rate regime. Already there is news that rains have been indifferent in the northern region. The budget assumes a nominal growth of 12-13 per cent, assuming a real growth of 6.7-7 per cent and moderately high inflation pressure of 5.3-6 per cent-something that might easily build up to a pressure point. If the liquidity isn’t mopped up, the chances of fiscal slippage are strong. Then there might be hell to pay in Parliament, thanks to the frbm Act.

Right now, though, people are willing to suspend their disbelief of the budget. They are dreaming along with PC. Like FICCI general secretary Amit Mitra who waves the budget shortcomings aside, saying that a seven-month budget cannot have giant leaps. But he would be really disappointed if the FM did not give us a dream budget next year. Wouldn’t we all?

P.S.

Paromita Shastri with Arindam Mukherjee, Suveen K.Sinha, Saumya Roy and Gauri Bhatia

Fiscally Smart

Tax revenues and ...

- 2003-04 (RE) 1.87

- 2004-05 (BE) 2.34

...Plan expenditure are up...

- 2003-04 (RE) 1.22

- 2004-05 (BE) 1.46

...But capital receipts and...

- 2003-04 (RE) 2.11

- 2004-05 (BE) 1.68

...Non-plan expenditure are down...

- 2003-04 (RE) 3.52

- 2004-05 (BE) 3.32

Deficits Of Central Government

(As Percentage of GDP)

Source: Budget Documents 2004-05

Internal Liabilities of Central Government

Source: Budget Documents 2004-05

in Outlook India, Monday, July 19, 2004.

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