Budgeting with caution -Video

BUDGET OPINION

A 100-minute Budget speech, full of announcements regarding large budgetary outlays, can mask a different kind of reality. As in past years, the finance minister has flattered to deceive""because the total increase in budgeted spending is just 10 per cent (if we exclude the one-off numbers relating to the purchase of State Bank of India shares from the RBI). That is substantially lower than the 15 per cent increase in spending during the current year, and suggests tight fiscal control despite all the big ticket announcements in the Budget speech. Mr Chidambaram has made a fine art of this smoke and mirrors game, but people are beginning to see through it. Setting the sectoral picture within the total budgetary scene would be the transparent course to follow. In fact, the Budget is noteworthy for the fact that the expenditure increase being budgeted is lower than the expected GDP growth next year. In relation to the GDP, the government is shrinking. You would not guess that from the Budget speech.

The picture on the revenue side shows a loss of steam. After getting a windfall 27.8 per cent growth in tax revenue this year, the finance minister has budgeted for just 17.2 per cent revenue growth next year. Caution seems to be the watchword in the revenue-budgeting exercise. The underlying assumption of 13 per cent nominal GDP growth, if achieved with lower inflation of (say) 5.5 per cent, suggests 7.5 per cent real GDP growth next year. That would be a clear slowdown from the 9 per cent average of the last two years. The Budget numbers anticipate that will be accompanied by a sharp drop in the growth rate for corporate profits""because the revenue from corporation tax is expected to grow 15 per cent next year (compared to 41 per cent this year). Similarly, customs revenue growth is expected to drop from 27.4 per cent this year to 20 per cent next year. Paradoxically, however, growth in excise revenue is expected to accelerate from less than 5 per cent to 11 per cent. It is possible, of course, that the finance minister has under-budgeted next year's revenue. Bear in mind that this year's tax collection has been 6 per cent more than budgeted. But given the high revenue base of the current year, the caution is justified.

It is creditable that, even as he assumes a downturn in the business cycle, Mr Chidambaram has managed to aim for the 3.3 per cent (of GDP) fiscal deficit mark for next year and is therefore on course for reaching the 3 per cent target set for 2008-09. However, it is now certain that the second and perhaps more important part of the fiscal correction target (a zero revenue deficit by the same year) is out of reach, because next year's revenue deficit target is still 1.5 per cent of GDP.

The problem with this year's numbers is not in relation to these broad arithmetical aggregates. Indeed, some specific tax proposals are also welcome. For instance, no one should complain about the minimum alternate tax being extended to software companies, which are doing quite well; the refusal to extend concessions under Sections 10A and 10B (of the income tax law) beyond their present expiry date is also welcome. And the decision to tax debt-mutual funds is unexceptionable, since it levels the field for bank deposits when it comes to tax treatment. Indeed, there is some evidence that the finance minister is having a re-think on the banking cash transaction tax. The raising of the floor level and the promise of a review next year suggest that the finance minister sees merit in listening to the critics.

The problem with the Budget is the lack of vision""signalling that the Manmohan Singh government has given up the reform agenda. Indeed, the finance minister has not even attacked the tax exemptions that he has been blaming for the lack of buoyancy in government revenue, nor has he taken any extra steps to get the system ready for a unified goods and services tax. Other than the cut in the fiscal deficit, the customs cuts are the only welcome feature from a macro-reform point of view. The second problem has to do with some specific tax proposals. The dual taxation of cement is a bad idea in every way. So also the imposition of the fringe benefit tax on employee stock option schemes""companies on a high growth track will be hit the hardest, and face an extra burden even though they earn no extra money. Extending the service tax to rent could reduce the incentive for building more commercial space, which is in short supply, and should be reviewed. In conclusion, the time may have come to abolish some subjects from a Rs 680,000 crore Budget; among the candidates would be umbrella parts, biscuits up to a certain price, and watch dials.

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