Debating India


A Balancing Act

Friday 30 July 2004

THE Union Budget for the financial year 2004-05, presented by Finance Minister P. Chidambaram, is a careful exercise that seeks to translate the concerns of the National Common Minimum Programme (NCMP) adopted by the United Progressive Alliance government into Budget proposals for what remains of the current financial year. It has remained broadly, though not entirely, within the parameters of the NCMP. In terms of policy pronouncements, which have in recent years become an increasingly prominent part of Budget speeches, even pushing expenditure and revenue proposals to the background, the Finance Minister has emphasised agriculture and rural development in a big way. This is not immediately reflected in the expenditure figures, but one must bear in mind that the sectoral allocations will get firmed up only after the Planning Commission completes the exercise of expenditure revision, based on the priorities of the NCMP, for the year, following the process outlined by the Finance Minister in his Budget speech. The Budget has also made a reference to the National Employment Guarantee Act promised in the NCMP and indicated that it will soon be brought before Parliament. In the interim period, the Budget has provided for food-for-work programmes in 150 backward districts where the programme is seen as being very urgently needed. Measures in support of agriculture announced in the Budget include enhanced credit to be made available through the banking system including regional rural banks and cooperative banks, insurance schemes for crops and agricultural incomes, removal of excise duties on farm and dairy machinery including tractors, budgetary assistance for irrigation, and tax breaks for agroprocessing units. Perhaps the most important measure flowing directly from the NCMP is the imposition of an education cess of 2 per cent on all taxes, estimated to fetch a revenue of Rs. 4,000 -5,000 crores in a full year and wholly earmarked for education. This is expected to help ensure primary education for all, including the provision of a nutritious cooked midday meal for the school-going child. The focus on irrigation and water harvesting in the Finance Minister’s speech is also in line with the thrust on rural development in the NCMP document. The increased budgetary support for the plan as well as the nearly 25 per cent increase in plan outlay for 2004-05 as compared to the revised estimates for 2003-04 reflects the Budget’s commitment to the NCMP mandate.

The Finance Minister’s provision of Rs.14,194 crores of equity support and Rs.2,132 crores of loans to Central public sector enterprises and his commitment that "major investments will be made in PSEs falling in the sectors of power, telecommunications, railways, roads, petroleum, coal and civil aviation" will be welcomed by all except hardcore neo-liberal market fundamentalists. These measures, as well as the decision to constitute a Board for Reconstruction of Public Sector Enterprises (BRPSE), are consistent with the NCMP’s stress on strengthening the public sector. The exemption from CENVAT granted to handloom and powerloom units will help address an important livelihood issue affecting millions of weavers, who have been badly hurt by the neo-liberal reforms of the last decade and need relief.

It is interesting to note that the corporate sector has generally hailed the Budget. While the financial media’s fond hopes of a repeat of the so-called "dream budget" of 1997 (which was in fact a disaster in terms of its huge tax give-aways to the corporates, its reward of the dishonest tax evader through the Voluntary Disclosure of Income Scheme, and the collapse of the budget numbers before the financial year was over) mercifully did not materialise, this Budget has also been very kind to large capital, both foreign and domestic. Except for the educational cess of 2 per cent levied on all taxes across the board, there has been no attempt in this Budget to raise resources from the well-to-do through higher rates of direct taxation. The Finance Minister evidently subscribes to the empirically unsubstantiated view that low tax rates result automatically in a high degree of compliance. His own remarks towards the end of his Budget speech on large amounts of extant tax arrears should bring home the point that low tax rates do not guarantee compliance and that there is a strong case for enforcing the tax regime rigorously. Additionally, if the NCMP is to be seriously implemented, there is an urgent need to mobilise additional resources, and higher rates of marginal taxation of corporate and personal incomes should receive due consideration. It needs to be emphasised that fiscal rectitude should not be taken to imply only (and mindless) expenditure reduction. One must also recall that tax-GDP ratios in India are among the lowest in the world and have been declining further during the period of neo-liberal reforms. A lack of political will to enforce tax laws cannot become a justification for lowering tax rates.

A positive feature of the Budget is its focus on the reduction of the revenue deficit rather than of that neo-liberal holy cow, the fiscal deficit. It is not often understood that the concept of the fiscal deficit and an obsession with its reduction serve to delegitimise borrowing by elected governments for purposes of productive investment even while the private sector, both domestic and foreign, is allowed a free run on the funds of public sector financial institutions. However, the Finance Minister’s assumptions regarding the growth of tax revenues seem overly optimistic.

Perhaps the most disturbing feature of the Union Budget is its continuation of uncritical external and financial liberalisation. The unilateral commitment to reduce import duties to levels prevailing in the Association for South East Asian Nations (ASEAN) region is unwarranted. The decision to enhance the cap on Foreign Direct Investment (FDI) in the insurance, telecommunications and civil aviation sectors is not only unwarranted but fraught with security implications. Besides, this proposal prevents the possible use of levels of FDI limits in these sectors as a bargaining tool in World Trade Organisation (WTO) negotiations. The concessions to foreign institutional investors, the abolition of tax on long-term capital gains in securities transactions, the reduction in the tax rate on short-term gains, and the decision to let banks play more freely in the stock market reflect the continuing hold of financial liberalism over policymakers.

Overall, both the Budget and the reactions to it reflect the fact that while the juggernaut of neo-liberalism has been checked by the electoral verdict of 2004, it still holds ideological sway in both the ruling and the Opposition coalitions as well as in the media.

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