Debating India


An exercise in evasion

Friday 30 July 2004, by MURALIDHARAN*Sukumar

In an effort to make the appropriate signals to various sections, the Union Budget takes a risky path that could lead the United Progressive Alliance to politically difficult situations.

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Finance Minister P. Chidambaram arrives at Parliament House to present the Union Budget on July 8.

BETWEEN the festive season last year, which saw the first glimmers of the "India Shining" campaign, and the elections this year, it became the political common sense that the agrarian sector in the country was facing a crisis of desperate proportions. Former Deputy Prime Minister L.K. Advani grudgingly conceded the case that the Indian farmer perhaps had no part in the shine that his regime had imparted to the economy. And the Congress party built its campaign on the perceived state of despair and devastation in the countryside, promising a new deal for the farmer if voted to power.

This continued to be the refrain through the days of ministry formation and the drafting of the "National Common Minimum Programme" (NCMP) that will guide the new Congress-led coalition. It was the signature theme of Finance Minister P. Chidambaram’s maiden Budget for the United Progressive Alliance Ministry. But as the budget speech wore on, a sense of puzzlement arose. Here was a Finance Minister who was promising to phase out the gaping revenue account deficit well before the mandated five-year period, handing out a vastly increased outlay for capital expenditure in the defence services, and promising that the long-neglected sectors of agriculture and social welfare will be given their due. How was he squaring the fiscal circle?

The mystery was largely dispelled with the figures coming in. Chidambaram has bargained for a massive increase in Central government revenues this year, well in excess of anything seen over the last decade and a half. He has severely held down committed outlays for agriculture, rural development and employment programmes. He has allocated a substantial Rs10,000 crores in Plan funding for the NCMP but not assigned it to any particular expenditure head. Instead, he has made the entire hike in allocation for these purposes contingent on a review to be undertaken in the next few months by the Planning Commission. Now headed by Montek Singh Ahluwalia, Finance Secretary during Chidambaram’s earlier tenure in the Ministry, the Planning Commission is expected to propose measures to reduce the plethora of Centrally sponsored schemes implemented by the States into some manageable order.

In remarks to the media after the budget speech was concluded, Prime Minister Manmohan Singh repeatedly underlined the issues of implementation and delivery. Implicitly, he was seeking to shift the focus of public scrutiny from the rather paltry allocations for agriculture and social welfare. The new mantra evidently is not to increase levels of public spending in these sectors, but to ensure that the limited expenditures that are committed deliver maximum results. It is a process that would involve enforcing a greater degree of transparency in the administration of these funds and ensuring that the bureaucracy that channels the top-down flow of funds remains accountable to the intended beneficiaries.

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(From left) Chief Ministers of West Bengal and Tripura Buddhadev Bhattacharjee and Manik Sarkar respectively, Pinarayi Vijayan, S. Ramachandran Pillai, Prakash Karat and party general secretary Harkishan Singh Surjeet at the CPI(M) Polit Bureau meeting in New Delhi on July 11. The Left is opposed to certain proposals in the Budget, particularly those relating to FDI.

The politics involved in this is complex. It involves the meshing of the process of allocating funds with the bottom-up articulation of demands by the poorest in the country. It could conceivably unsettle local relations of power on which regional and national politics is constructed. Whether the Congress party is prepared to face the full consequences of this process is yet unclear.

It may seem a little far-fetched to say that the UPA government will compensate for a 15 per cent cut in the Plan outlay for rural development, a token, almost derisory hike in the provision for the public distribution of food, and an insubstantial increase in the outlay in agriculture, by reforming the administration and rearranging the contours of politics at the local level. But that is the promise inherent in the Budget for 2004-05. And the time available for the UPA to deliver is limited. The previous government deluded itself into the belief that a modest rebound from the disastrous drought year of 2002-03 was indeed evidence that the Indian economy had moved onto a dynamic new growth trajectory. The current administration cannot afford for very long to proceed on the belief that illusions of a recovery from a very bad year would suffice, rather than the restitution of all the damage that has been suffered over a decade of neo-liberal economic policies.

Another platform that the Budget uses to address the crisis in the agrarian sector is the credit system. The Finance Minister has directed regional rural banks (RRB) to increase the credit availability for agriculture and held out the assurance that the lead bank for each RRB would be held accountable for any failure on this account. But among the expenditure heads that the Budget economises on is the capitalisation of banks. Coupled with the debt buyback scheme of the government, which involves the swapping of older debts which are liable for a higher interest for newer, lower cost debts, this represents a zone of some uncertainty for the banking system. The effort at curbing the growth of non-performing assets has been misdirected for long at the agricultural and small-scale industry sector rather than the medium and large-scale industry sectors, where its dimensions are truly mammoth. Given this mix of circumstances, the banks’ ability to extend the required quantum of credit to agriculture cannot be deemed to be quite adequate.

On the revenue mobilisation side, Chidambaram’s effort does not afford very much novelty. A turnover tax on stock market transactions has been introduced, partly to mitigate the losses on account of the moderation of the capital gains tax. But the turnover tax remains contentious, with a powerful mobilisation of stock traders seeking to make it an issue on which they would paralyse the markets. And its yield cannot be computed with great accuracy, since the discipline of a tax would drive underground many of the speculative transactions that were rife in the stock market.

The extension of the service tax and its integration into the centralised value added tax (CENVAT) chain potentially taps new sources of revenue and offers the merit of simplicity in accounting. But its yield again remains uncertain. Past experience with the service tax does not indicate that it is a buoyant source of revenue.

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Day traders protesting against the securities transaction tax on the transfer of shares being arrested outside the Bombay Stock Exchange.

This leaves the 2 per cent cess on all taxes as the single most important revenue initiative taken by the Minister this year. With an expected annual yield of over Rs. 4,000 crores, the cess would be reserved entirely for extending the reach of basic education and upgrading its capacities.

This long-overdue recognition of the value of education has, naturally enough, been welcomed. But it is an index of the course of tax reform over the last decade and a half, that the government has finally had to seek recourse to the blunt instrument of a cess to meet a vital social need. The measure is reminiscent of the "surcharges" that were introduced on corporate and personal income taxes in the late 1990s, ostensibly as temporary expedients, only to show a remarkable persistence over the years.

The initial premise of the neo-liberal reforms introduced in the early-1990s was that it would promote private initiative in the productive sectors, while leaving the government with sufficient wherewithal to attend to its tasks in the sectors that really mattered. With government revenues plunging, the outcome has been a crisis of livelihoods in the agrarian sector and a serious investment famine in vital infrastructure areas. The surcharges and cesses are admissions, even if inadvertent, that this basic premise has been exposed as hollow.

With all the provisions - even if they are in large part illusory - made for the rural and welfare sectors, the Finance Minister had to make the appropriate signals to private corporate interests that they had not entirely been forgotten. The signal he chose was to raise the foreign direct investment ceiling in the three areas of insurance, civil aviation and telecom. Yet, most expert opinion is unconvinced that the ceiling has been a constraint in any way on investments in these sectors. If anything, the demand constraints have been the decisive factor. And to circumvent this problem, investments need to flow into areas, and target constituencies, that the corporate sector is not normally very mindful of. Early political turbulence is foretold over these proposals, with the Left parties making it clear that they will vote against the proposal on insurance in particular.

Inevitably, media comment after the UPA’s first Budget sought to evoke the image and spirit of the 1997-98 exercise, partly because the principal author was the same. But the discussion tended to miss the central point about the "dream budget" of the 1990s. It was then hailed as a decisive break with the notion of "zero sum economics". By boldly reducing tax rates and bargaining for a massive increase in revenues as a consequence, Chidambaram had ostensibly in 1997 laid to rest the old belief that to bring benefits to the disadvantaged, you had to impose a certain burden on those more fortunate.

The actual revenue accruals showed how disastrously miscued these calculations were. In relation to the budget forecasts, actual tax receipts in 1997-98 fell short by 17 per cent in nominal terms. This was by far the most serious fiscal miscalculation since the neo-liberal economic reforms began in 1991.

Tax buoyancy expectations this year are premised not so much upon the old "supply side assumption" - that lower rates yield higher revenues - but on the more mundane calculation that long-overdue arrears will finally be paid up. The path that the Finance Minister has chosen is a risky one. And if revenue accruals fall short, there is little question that the first expenditure commitments to suffer would be the ones that the budget speech sets greatest store by. That could be the surest path to a political crisis of enormous dimensions for the UPA.

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