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| Shaped by short - termism |
| Budget 2000 - 2001 |
| By S Swaminathan |
| Economic backdrop for budget
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| The Economic Survey 1999-2000 which was tabled
in Parliament by the Government on the eve of presentation of
the Budget for 2000-2001, offers a portrait of the economy as
it is emerging from a three-year long slow-down in industrial
production mainly owing to a demand recession. Even though the
growth rate for Gross Domestic Product (GDP) during 1999-2000
has been estimated at only 5.9 per cent (as compared to 6.8
per cent in the previous year), the indications of a revival
of industrial growth (at 6.2 per cent for April-December 1999-2000
as compared to a dismal 4.0 per cent for the whole fiscal year
1998-1999) are indeed strong. A slump in agricultural performance
(a decline by 2.2 per cent) after a year of spectacular growth
at 7.4 per cent seemed to suggest the GDP growth rate ought
to have been much higher if the blip in agricultural production
had not occurred. Within industry, manufacturing appeared to
have overcome the inertia of the previous two years with a 7
per cent growth. “Construction” emerged as a key
growth sector during 1999-2000 with an estimated growth rate
of 9 per cent (as compared to 5.7 per cent in 1998-99). Given
the structural transformation of the economy since 1991, it
is not surprising that the services sector is emerging as a
major contributor to the GDP accounting for as much as 51.2
per cent in 1998-99. In 1999-2000, this sector recorded a growth
of 8.2 per cent with the sub-sector “Financial services”
registering a growth of 10.5 per cent (as compared to 6.1 per
cent in the previous year). |
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| The year 1999-2000 turned out
to be an unprecedented period of low inflation for the Indian
economy with the average annual rate of inflation almost pegged
at 3 per cent as against 6.9 per cent in the previous year and
10.9 per cent in 1994-95. It is still an unsettled dispute among
economists whether the low rate of inflation captured by the
Wholesale Price Index is a statistical illusion or an aberration
given the expansion in Broad Money Supply (M3) of the order
of 12-13 per cent during the year. Nevertheless the reality
of a comfortable supply position with regard to primary articles
and manufactured products and the increasing pressure on margins
in industry emanating from growing competition in markets triggered
by import liberalisation seemed to validate the belief that
low inflation is fast becoming an integral feature of the restructured
economy. |
| As Finance Minister, Yashwant
Sinha could not have bargained for a more resilient Balance
of Payments situation than what the year 1999-2000 had yielded.
Despite the East Asian economic crisis of 1997-98 and the sanctions
clamped down on India by the US in the wake of Pokhran-II nuclear
tests, the forex reserves continued to rise with a net accretion
by $2.4 billion during April 1999-January 2000. Export growth
at around 12 per cent for the year (as against a decline by
4 per cent in 1998-99) and significant improvements in portfolio
investment and non-resident deposit inflows combined with a
moderate import growth of about 9 per cent had ensured that
the total forex reserves at about $35 billion provided ample
cushion for imports covering as much as 8 months’ import
commitments. The Rupee stayed strong and stable throughout the
year range-bound between 43.30 and 43.60 as against the US dollar.
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| The
flip side |
| Economic Survey 1999-2000 is not all Hosannas
to the Indian economy. Apart from the dip in agricultural production,
there were areas of concern which the survey depicted in candid
detail. All was not well on the savings front. In 1998-99, Gross
Domestic Savings had declined to 22.3 per cent of the Gross
Domestic Product, from 24.7 per cent in 1997-98. The Investment
Rate in the economy had suffered as a result. From 26.2 per
cent in 1997-98, it came down to 23.4 per cent in 1998-99. The
implication clearly was that the growth rate in the economy
(around 6 per cent) could not be sustained without the reactivisation
of investment. Apart from the decline in domestic capital formation,
what was causing concern was the none-too robust outlook for
Foreign Direct Investment (FDI) inflows. |
| Challenging as these deficiencies were, the
central issue which called for concerted attention was the chronic
fiscal imbalance – the plight of the Centre and the States
caught as they were between snowballing expenditure and stagnant
revenue receipts. The Survey underscored fiscal correction as
the precondition for accelerating economic growth. There was
little quibbling that “hard decisions on many fronts”
would be needed for putting the fiscal system back on its feet.
This language of “hard decisions” has been reverberating
through the corridors of power in New Delhi for weeks before
Sinha unravelled his budget. |
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| But then weeks after the event, analysts continue
to wonder where these “hard decisions” reside in the budget.
To say that Sinha’s package of tax proposals has produced consternation
in corporate circles is not to go along with the fiction that his
is a tough-minded budget. |
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| Budget
in the three segments |
| The belief that a budget is a
logical construct with an overarching economic design might
appear to be an idealist approach to what perhaps can only remain
a string of numbers backed by the dominant instinct of political
survival. But then an analysis of a budget cannot properly turn
on political motivation but should be anchored in the premise
that it is a financial plan articulating a pattern of preferences
and compulsions of a Government in action. Considered this way,
there are three broad segments of the budget which merit close
scrutiny. |
| These are: |
| 1. |
The expenditure plan with its
priorities |
| 2. |
The strategy for resources mobilisation
through taxes and other revenue receipts and |
| 3. |
The management (or mismanagement)
of the resources gap through deficit financing, tolerable or
otherwise. |
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| Sinha’s
expenditure blueprint |
| Contrary to the catechism which the Finance
Minister has all along been treated to, he has simply not been
able to tame expenditure. The budget for 2000-2001 entails a
total spending of Rs.3384.87 billion – an increase by
a seemingly modest 11.5 per cent – compared to Rs.3037.38
billion in 1999-2000. The complexion of the plan changes when
the inexorable phenomenon of overshooting of expenditure is
reckoned with. Last year, Sinha projected a total expenditure
of Rs.2838.82 billion whereas the actual expenditure exceeded
the estimate by around 7 per cent. In absolute terms, what the
new budget envisages is an increase of Rs.348 billion in total
expenditure. The breakdown of the incremental expenditure is
as follows: |
| |
(Rs.billion) |
| Interest
payments |
98.4 |
| Defence |
100.8 |
| Resources
transferred to State Governments |
110.1 |
| Other
items |
38.7 |
|
| An interesting aspect of the increase in
expenditure planned for 2000-2001 is that almost 81 per cent
of the increase relates to revenue expenditure at a time when
government investments in infrastructure are crucially needed
to upgrade the economy. Looking at it differently, of the increase
in total expenditure of Rs.348 billion, only Rs.76 billion represent
the budgetary allocation for what is called “Central Plan
Outlay” – a term which effectively misleads public
perception into believing that such items of expenditure carry
special virtues of strictly-prioritised categories of spending!
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| Strategy
for resources mobilisation |
| As against an incremental expenditure of Rs.348
billion for the year, Sinha’s budget anticipates additional
net tax revenue of Rs.197 billion. What is involved here is the principle
of tax devolution in a federal polity according to which the Union
Government is the fountain-head for tax resources mobilisation with
the corresponding obligation to share the tax proceeds with the State
Governments. Sinha’s budget provides for a total increase in
Gross Tax Revenue by Rs.303 billion of which the State Governments
are to have a share to the extent of Rs.106 billion (or about 54 per
cent). |
| The breakdown of the increase in the Gross Tax Revenue
projected in the budget is as follows: |
|
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| |
(Rs.billion) |
| Corporation
Tax |
101 |
| Income
Tax |
49 |
| Customs |
57 |
| Union
Excise Duties |
102 |
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| It should be noted that of the
total increase in Gross Tax Revenue of Rs.303 billion, only
Rs.69 billion constitute Additional Resource Mobilisation (ARM),
the balance being derived from the growth factor in the economy.
If the assumption is that GDP growth next year will be 7 per
cent and that inflation will rule at 4 per cent, a Gross Tax
Revenue projection of about Rs.1905 billion, would be in order.
The Finance Ministry’s projection of Rs.2003 billion of
Gross Tax Revenue could well prove over-optimistic. That apart,
the prospect of direct taxes (Corporation Tax and Income Tax)
contributing only 36 per cent of the Gross Tax Revenue compared
to 64 per cent being accounted for by commodity taxes offers
its own comment on the largely unfinished agenda of tax reforms.
|
| The overall effect of the budget
proposals regarding taxation is as follows: |
| |
(Rs.billion) |
| Corporation
Tax |
50.00 |
| Income
Tax |
10.80 |
| Interest
Tax (Abolition) |
-
10.00 |
| Customs
Duties (Concessions) |
-
14.28 |
| Union
Excise Duties |
32.52 |
| Total
Additional Resource Mobilisation (ARM) |
69.04 |
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| The
economics of the tax proposals |
| Yashwant Sinha has not put forth any elaborate
rationale for the tax proposals introduced in the budget excepting
a bland statement that he has attempted an equitable distribution
of the tax burden among the different segments of the population.
Even granting that the budget is not particularly premised on
the objective of raising the ratio of direct tax revenue to
the gross domestic product, it is difficult to erase the impression
that the tax proposals are mainly targeted at the corporate
sector. The five year phasing-out of tax exemption of export
earnings is not part of tax reforms but is rather a belated
recognition of its incompatibility with the WTO mandate. The
reduction in the rate of tax under the scheme of Minimum Alternate
Tax (MAT) from an effective 10.5 per cent of the book profits
to 7.5 per cent with the exclusion of export profits similarly
does not represent any march towards rationalisation of the
tax regime. The more controversial aspect of the proposals regarding
corporate taxation is the move to increase the tax on distributed
profits of domestic companies from 10 to 20 per cent. Even if
a restraining impact is claimed for the proposal as regards
the tendency for corporates to distribute largesse to shareholders,
the question of needless discrimination against domestic companies
cannot be overlooked. All this apart, the decision to continue
with the surcharge on income tax and corporation tax and to
raise the surcharge to 15 per cent in the case of personal incomes
above Rs.1.5 lakh cannot be too strongly deprecated on ethical
grounds. |
| Contrary to the strong economic case for utilising
the transition period under the WTO dispensation for operating
relatively high tariffs on imports in the wake of termination
of Quantitative Restrictions on a wide range of imports, the
Finance Minister seems to have plumped for a more fashionable
low-tariff regime. The result is not only a tax give-away of
Rs.14.28 billion on customs but also an overall moderate growth
of anticipated Customs Revenue at Rs.535.72 billion or by 12
per cent. |
| The rationalisation of the Excise Duty Structure
through the introduction of a single rate Central Value Added
Tax (CENVAT) at 16 per cent in the place of the three existing
rates of 8 per cent, 16 per cent and 24 per cent would have
been a progressive reform but for the decision to live with
the special Excise Duty with a three-tier structure. Indications
of an assessee-friendly Excise Duty regime are not however lacking.
Payments from 1 July, 2000 of Excise Duty in fortnightly instalments
instead of on a day-to-day basis and the decision to dispense
with statutory excise records are moves in the right direction.
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| Non-tax revenue |
| The receipts under this head are
projected to increase to Rs.574.64 billion in 2000-2001 from
Rs.530.35 billion in 1999-2000 or by about 8 per cent. The major
constituents of non-tax revenue are Interest Receipts, Dividends
and Profits. While Interest Receipts are expected to increase
to Rs.367.21 billion in 2000-2001 from Rs.341.44 billion in
1999-2000, Dividends and Profits are projected to grow from
Rs.93.10 billion in 1999-2000 to Rs.112.04 billion next year
or by about 20 per cent. It must be noted, however, that in
1999-2000, Dividends and Profits (reflecting the performance
of Public Sector Enterprises and financial institutions including
nationalised banks) actually showed a short fall of 2.2 per
cent in terms of the budgeted figure of Rs.94.82 billion. This
was mainly because the “surplus profits” of the
Reserve Bank of India were down to Rs.45 billion as against
the projection of Rs.57 billion. |
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| Capital
receipts |
| The central challenge of budgetary policy
in India is to rein in revenue deficit and to apply capital
receipts increasingly towards investments in the public sector
even if the broad concept of downsizing of government comes
to be earnestly implemented. The view that all forms of borrowing
by the government need to be eschewed is a part of what is known
as the Washington Consensus inspired by the IMF and the World
Bank. In terms of the realities of infrastructural inadequacies
in India and the remoteness of the expectation of large cascades
of private investments flowing into infrastructure projects,
the government will have to continue to make investments in
this sector for years to come. The question is how the government
can cope with this expectation so long as capital receipts are
applied to the financing of the revenue deficit. In 2000-2001,
total capital receipts of the order of Rs.1397 billion are anticipated.
The breakdown is: |
| |
|
(Rs.billion) |
| |
1999-2000 |
2000-2001 |
| Market loans |
770.74 |
812.67 |
| External assistance (net) |
90.56 |
- 0.44 |
| Recoveries of loans |
127.36 |
135.39 |
| Disinvestment |
26.00 |
100.00 |
| Small savings |
80.65 |
80.00 |
| All other items |
112.33 |
269.36 |
| |
1207.64 |
1396.98 |
|
| Given a projected revenue deficit of Rs.774.25
billion, there is no getting away from the fact that market
borrowing will largely be used to offset the revenue deficit
and that there will be little capital expenditure by way of
investment in the public sector apart from an increase in the
Defence Capital Outlay by Rs.53 billion. |
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| Government
of India Budgetary Trends |
| Figures in Rs.billion |
|
1990-91 |
1995-96 |
1996-97 |
1997-98 |
1998-99 |
1999-2000 |
2000-2001 |
Total Expenditure
of which |
982.72
(18.4) |
1682.85
(14.2)
|
1903.36 (14.0) |
2163.36 (14.3) |
2793.66 (15.8) |
3037.38
(15.6) |
3384.87
(15.5) |
| Revenue Expenditure |
735.16 |
1398.61 |
1589.33 |
1803.50 |
2174.19 |
2530.36 |
2810.98 |
| Capital Expenditure |
247.56 |
284.24 |
314.03 |
359.86 |
619.47 |
507.02 |
573.89 |
Revenue Receipts
of which |
549.54 |
1101.30 |
1262.79 |
1339.01 |
1495.10 |
1795.04 |
2036.73 |
| Net Tax Revenue |
429.78 (8.0) |
819.39
(6.9) |
937.01
(6.9) |
956.72
(6.3) |
1046.52 (5.2) |
1264.69
(6.5) |
1462.09
(6.7) |
| Non-Tax Revenue |
119.76 |
281.91 |
325.78 |
382.29 |
448.58 |
530.35 |
574.64 |
| Revenue Deficit |
185.62 |
297.31 |
326.54 |
464.49 |
679.09 |
735.32 |
774.25 |
Capital Receipt
(Borrowings) |
262.59 |
404.46 |
428.77 |
732.05 |
1133.49 |
1088.98 |
1112.75 |
|
Fiscal Deficit
(=Revenue Receipts+
Recovery of Loans+
Disinvestment
Proceeds –
Total Expenditure)
|
373.06
(7.0)
|
502.53
(4.3)
|
560.62
(4.1)
|
732.05
(4.8)
|
1133.49
(5.0)
|
1088.98
(5.6)
|
1112.75
(5.1)
|
| Figures in brackets are percentages in terms of
GDP |
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| The accompanying table summarises
the budgetary trends since 1990-91. If there is one central
message which comes through the data, it is that Indian fiscal
management has to be extricated from three serious deficiencies. |
| These are: |
| 1. |
The preponderance of revenue expenditure
totally disproportionate to the cost-effectiveness of governance, |
| 2. |
The lag in tax revenue in relation
to the growth in GDP since 1991 and |
| 3. |
The gross failure of the policy
makers to correct the distortions caused by a constellation
of inefficient and bloated public enterprises. |
| The verdict on Sinha’s budget for 2000-2001
may sound harsh but the tragic failure to address questions
of Savings and Investment and the critical need to accelerate
economic growth as a necessary condition for improving the lot
of the poor seems so obviously mirrored in the budget which
has not illogically been described as a lost opportunity. |
| The author is a well-known academician turned
journalist and a former Economic Adviser to the Sanmar group.
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The
flip side 
