Betting on growth

INTERIM BUDGET & OPINION

The first impression created by Jaswant Singh is that his interim Budget is everything that it should be: restrained with regard to new announcements in view of the coming elections, and showing healthy fiscal numbers.

The fiscal deficit is better than anyone forecast, and is back to the level where P Chidambaram left it six years ago; and the primary deficit (which is the deficit other than on account of interest payments) is close to zero, being just 0.2 per cent of the GDP.

In other words, the government is now living within its means, and is only paying for its past sins of profligacy.

Even the details are pleasing, in that tax revenues have done well (especially corporation tax) and the policy of reducing interest rates has paid off, because it has controlled the government's own interest outgo.

The cost of servicing the government's debt has therefore dropped handsomely, when seen in relation to revenue receipts.

Amazingly enough, even subsidies are less than budgeted, and the government's market borrowings are down sharply, by 27 per cent.

All this is wonderful news, and commentators who had warned of a fiscal problem flowing from last month's generous give-aways must now take back their words. This newspaper was one of the critics, and is happy to have been proved wrong on this point.

For the finance minister has been better than his word. Indeed, since he has projected a revenue deficit next year of just 2.9 per cent of the GDP, he is on course to hit the ambitious target of wiping out the revenue deficit by 2007-08. No one could have expected more.

And yet, there is room for some questions, chiefly about the underlying assumptions. For starters, the finance minister is projecting 26 per cent growth in corporation tax receipts next year, on top of the astronomical growth already achieved in the current year, of 36 per cent.

That's not all. Income tax revenue is slated to increase next year by 15 per cent (9 per cent this year), and excise collections by 16 per cent (12 per cent this year); even customs revenue is expected to grow 7 per cent, despite the Rs 10,000 crore given away last month.

Clearly, the expectation is that the corporate sector will continue to prosper handsomely, and that industry will be booming. It might happen, but there is a lack of caution in the numbers.

The related assumption is that nominal GDP (which is calculated as growing 13.2 per cent this year, including inflation), will grow by a further 12.7 per cent next year.

In other words, if inflation stays in control, next year's real GDP growth is expected to be in the region of 8 per cent. That optimistic assumption lies at the core of the healthy numbers for 2004-05.

The corporation tax numbers might well happen, because some of the tax on this year's profits will be paid next year, and corporate performance has been healthy right up to December, with no sign of any reversal of trend.

The GDP numbers are more of a gamble, and depend on the monsoon and a favourable world environment. The finance minister would have been wise to show the same caution as he did a year ago, when presenting his first Budget.

The second negative that comes into focus, and which may not be obvious at first sight, is the decision to merge government employees' dearness allowance with basic pay up to a specified threshold.

The Central government's accounts will be hit to the extent of about Rs 3,500 crore. This might seem affordable, in the context of the general fiscal improvement.

But the state governments will feel obliged to follow suit, and if assessments done by government experts are to be believed, the bill for the states is likely to be a massive Rs 10,000 crore "" which most of the states simply can't afford.

In other words, Jaswant Singh through this one populist measure has undone some of the good work that is on display in the rest of the Budget.

To his credit, though, he has been able to use the new monitoring system to keep expenditure under check"" something that the Vajpayee government has not been known for till now.

Next year's total expenditure shows an increase of barely 4 per cent on this year's original numbers, and the finance minister has done well within this to provide for a substantial increase in budgetary support to Plan spending.

There is also reason to believe that the years of fiscal deterioration might be coming to an end, for two reasons.

One, the low interest regime and the retiring of high-cost debt remove a critical pressure point. Two, the subsidy splurge seems to be coming under control. Three, service taxes were non-existent till recently, but next year will contribute close to a half of 1 per cent of the GDP, and should keep growing.

Finally, the economy is better poised now than in the past; and as this year has shown, growth is a good solution for deficits. All those who have been fretting about the failure to control the fisc should therefore sleep easier.

Which makes it all the more regrettable that Jaswant Singh should continue with his wholly retrograde practice of meddling with bank lending policies.

Last month he announced the setting up of some funds that would use up a significant chunk of banks' loanable funds, and decreed the interest rate at which the money must be lent.

He has now taken this a step forward by decreeing that the banks must lend to the troubled tea and sugar industries (sugar's problems being the government's creation through outlandish cane pricing decisions), again at stipulated rates of interest, and even ordered the increase of credit card limits.

It is easy to understand the minister's desire to make grandstand announcements involving large sums of money, at little budgetary cost; but the money is not his, it belongs to depositors "" and bank managements should be encouraged to act independently, in their own best judgement, without the pressure of ministerial diktat.

On the positive side, the finance minister has done well to address the stamp duty issue and promise that the outlandish levels of duty being levied by some states will be corrected.

This will reduce transaction costs and also encourage honest accounting of real estate transactions. Jaswant Singh should in fact go a step further and replace the whole stamp system, in view of the Telgi scandal.