Subir Gokarn: Fiscal fragmentation

BUDGET OPINION

Subir Gokarn, Chief economist, Crisil

My main characterisation of last year's Budget was that it showed a welcome transition from "project" to "programme" mode. Essentially, rather than making piecemeal and often unrelated allocations, Budget 2006 aggregated allocations under some broad themes, emphasising the interdependence between different components of large programmes. Recognising these and providing resources in a balanced manner to these components is the key to getting the most out of programmes.

Unfortunately, the dominant impression that Budget 2007 made on me is a 180-degree reversal to the project mode. The speech was filled with references to a large number of allocations ranging from a few crores of rupees to a few thousand crores, all apparently being given equal importance, at least in terms of word count! The Budget reflects a compulsion to be seen to be doing something for everybody, however small and insignificant. In satisfying that compulsion, it has perhaps lost an opportunity to consolidate and reinforce the impetus that a focus on a few, large and critical programmes may have provided.

If there was a defining theme, it clearly was "regeneration of agriculture". Rural roads, more money for irrigation, rejuvenation of defunct water resources and replenishment of groundwater and so on are, at the end of the day, schemes that have been tried in one form or the other before. We really do not have clear evidence of their overall effectiveness and it was incumbent on the finance minister to justify enhancement of these schemes with some demonstration of successful outcomes.

The fact that the breakdown of the agricultural supply system with respect to major foodgrains is at the heart of the current inflationary situation indicates that "more of the same" is hardly the way to solve the problems of the sector. With the supply situation in pulses, in particular, having deteriorated so sharply, the measures proposed for this commodity smack of tokenism. Even though, as the Economic Survey admitted, it was rather difficult for the finance ministry to provide immediate relief, a somewhat higher profile and concentrated programme to enhance and stabilise the supply of pulses over the long haul. The panic reactions suspending forward trading in pulses first and then cereals don't help, either, in furthering the means of transmitting genuine price signals to farmers.

Similarly, in a scenario in which extreme shortages of several skills called for a great leap forward in education policy, laying out the roadmap for foreign investment in an overall framework for public-private partnerships. Although it was announced a few weeks ago that the Union Cabinet has approved the entry of FDI into higher education, the Budget speech was silent on this. Overall, although the aggregate allocations to both education and health have grown significantly, helped by an enhancement of the education cess, they appear to have been spread widely over a large number of schemes, increasing the demands on the system by way of monitoring, co-ordination and, ultimately, delivery.

On the macroeconomic front, though, one cannot really fault the arithmetic. The deficits, both revenue and fiscal, came in under the Budget estimates for 2006-07 and comply with the FRBM targets for 2007-08. More so, the expectations of revenue increases from all categories of taxes are quite conservative in relation to the performance during 2006-07. Revenue accruing to the central government grew by about 28 per cent during 2006-07, while it is estimated to grow at only about 17 per cent in the year ahead. One wonders about the need for such pessimism, particularly in a scenario in which GDP growth should be around the 8 per cent mark, if not higher, in 2007-08. While it virtually ensures that the deficit targets will be easily met, it also represents a lost opportunity to put more resources into initiatives that have proved to be successful in recent years.

Finally, I noticed two deviations from the fundamental principle of "equal treatment". Differential rates of excise on cement based on selling price? Brings back memories of the Bureau of Industrial Costs and Prices, where I began my career. Anachronistic, to put it mildly. And, there was no reference to the extension of taxes on export earnings, such as the STPI scheme, which benefits the IT-ITES sector. These benefits will now only be available to companies locating in SEZs. An activity on one side of a boundary wall will not get the benefits that it is entitled to on the other side. Doesn't quite seem right.