Will he be lucky?

This is a Budget constructed on a wing and a prayer.

The finance minister assumes that the corporation tax will give him 40 per cent more revenue than last year, and in the case of income tax, 25 per cent more. Even excise duties are slated to grow 18 per cent.
Overall, tax revenue is to grow by nearly 25 per cent.

Some of the increase is explained by the 2 per cent cess for financing the outlay on education, and some by the expanded scope of a service tax hiked from 8 per cent to 10 per cent. Even after making allowances for these, the revenue targets become achievable only if GDP grows as rapidly as has been assumed: 13.5 per cent in nominal terms.

If inflation stays in the 5.5 per cent range, that will mean repeating last year's story of 8 per cent real growth. Without a kicker from agriculture (you can't expect 10 per cent growth in farm output two years in a row), this is going to need a lot of prayer. If the revenue and growth assumptions don't materialise, the deficit numbers in relation to GDP are going to look very different eight months from now "" or, some of the planned expenditure will have to be cut back.

In short, Mr Chidambaram will have to be both very efficient (he hopes to collect a lot of tax arrears) and very lucky. One wishes him luck, but it may have been wiser to build some cushions into the Budget's assumptions.

The revenue figures may have been influenced by the work being done by Vijay Kelkar and his team, on streamlining tax administration and building databases so as to detect evasion and plug the loopholes in the tax net. But after deciding to work on the basis of upbeat numbers, the finance minister should have asked himself what his Budget would do for sustaining rapid growth "" since that is what can get the arithmetic to add up.

Though Mr Chidambaram has announced some schemes for financing infrastructure investment, given some tax concessions to encourage investment, and sweetened the regime for specific industries and products like tractors, computers and power, his is not what most people would call a growth-oriented Budget. Throw in the fact that the handsome cutting of the deficit possibly involves some sleight of hand, through the debt swap scheme with the states, and the whole exercise raises questions that don't have immediate answers.

Having said that, there is expert budgeting on display. Non-Plan revenue expenditure (which should get the lowest spending priority) is firmly under control "" there is even an absolute reduction in the subsidy bill "" while Plan spending through the Budget will be up a handsome 20 per cent on last year, and 8 per cent up on the interim Budget numbers presented in February. Within the Plan the real growth (when compared with the interim Budget) is in capital expenditure "" which is what the government should be focusing on.

In short, the finance minister has got his spending priorities right, so that the revenue deficit falls more steeply than the fiscal deficit (which too is as it should be). The sharp increase in capital outlay on defence items would seem an aberration in this context, but Mr Chidambaram has explained that this is a one-time exception being made to clear pending bills on presumably big-ticket acquisitions (the Hawk and the Gorshkov come to mind), and does not signal any militarism.

Within the various spending categories, he has re-jigged the numbers and managed to maximise the money available for all the election promises that the Congress and its allies had made: education, medicare, food for work, accelerated work on irrigation projects, and so on. If the prime minister has even a modicum of success in ensuring improved delivery, no one should cavil at these spending priorities.

To those who thought and argued that this government will not be able to push ahead with economic reform, Mr Chidambaram has given an effective reply. He has continued with small-scale industry de-reservation, put privatisation (and not just disinvestment) back on the agenda through a re-born disinvestment body, expanded the scope for foreign investment in three key sectors, and of course slashed the deficit.

There are many things the finance minister has not done, but in fairness he has been in office for barely six weeks, and the real action has been promised in February.

In short, while the Budget is optimistic in its assumptions, it largely does what it should do and what the government had promised to do. It is neither tax-and-spend, nor contractionist. Which makes it doubly unfortunate that the good work should be undone by the misguided announcement of a turnover tax on stock market transactions. Share prices have taken a knock, and are generally forecast to fall further.

This newspaper had argued against such a turnover tax earlier in the week, and those arguments stand. In addition, there is now the problem that the tax on speculative gains on the futures market remains at 33 per cent, while that on short-term capital gains is 10 per cent. If this is not changed quickly, the futures market is as good as dead.

Long-term capital gains, meanwhile, become completely tax-free. This raises clear issues of inter se equity, and (of course) equity in the eyes of those who pay up to 33 per cent tax on income earned in ways other than through trading in shares.

The finance minister has said he is willing to discuss the issue; he would be well advised to retrace his steps. This is not just an issue of a few brokers or day-traders or foreign institutional investors "" whose narrow interests Mr Chidambaram posits against the much larger body of farmers (why should this be a zero sum game?). There is the question of market liquidity, and there is the business of a fair taxation regime, quite apart from opening up to the risk that future finance ministers will surely seek to extend the turnover tax to all manner of other transactions.

This is something that is best nipped in the bud.