A tax budget, not a tough one

The Indian finance minister presented the Union Budget for 2000-2001 on 29 February. Under the Indian Constitution, the finance minister has to present an annual financial statement of the central government´s revenue and expenditure before Parliament. The Indian Constitution provides for a Consolidated Fund. All money must go into this Fund and all money must be spent from it. However, this cannot be done without Parliament´s approval. Hence the need for the budget. (There are small sums of money that can be spent from a Contingency Fund and there is a Public Account where deposits like small savings are kept. But these are not very important.).Traditionally, the budget has been important because it varied excise, import duties and direct tax rates on a year-to-year basis. And if reforms had really taken hold, this would not have been the case any longer, and people would have lost interest in the budget. But since that has not yet happened and we are still in the transient phase, the budget is still important. Not because of the numbers, but because of what it does to the reform process, and the growth stimulus it imparts..Since the first attempt at reform in 1991, the popular perspective of the budget has thus changed. But, except for some tinkering in the financial sector, there have been no substantial reforms since 1993-94. On fiscal deficit, the bulk of expenditure is non-plan expenditure (meaning expenditure that is not for projects, but is current expenditure). Today, if one adds up revenue expenditure on four heads —interest payments, defence, subsidies and salaries and wages of government employees — and compares this with revenue income, there is already a deficit. That is how serious the deficit problem is. There is no surplus on the revenue account to finance an expected deficit on the capital account..The expectation from Finance Minister Yashwant Sinha was that he would introduce reforms in the budget and address problems of subsidies, wages and salaries of government employees, and interest payments. And the finance minister was remarkably well placed to present a truly "Millennium Budget", so called by the minister over and over in his speech, as the government is under no immediate threat, and the economy is recovering..Even if one accepts the point that the only solution to interest payments is to divest equity in public sector undertakings (PSUs), which will be done outside the budget, Sinha could have done several things on subsidies and government expenditure. Even if some government jobs are lost in the process of switching resources to more productive avenues, many more jobs will be created elsewhere in the economy. Returns on government expenditure is inefficient at present, so resources have to be redirected towards the private sector where returns are higher. That, or the system of allocation, must be reformed..On allocation itself, consider the system India inherited from the British and went on to perfect. No ministry or department asks for what it needs. It inflates demand, because it anticipates a cut. The Finance Ministry and the Planning Commission approve expenditure for a ministry or department, but without the technical for such a task. So they simply take the previous year´s figure and adjust it upwards for inflation. Once approved, a ministry or department´s funds are not necessarily spent on what they were meant for. There is no monitoring. Ostensibly, there has been a Performance Budget since the 1970s, but this is nothing other than make-believe since release of subsequent funds is not linked to performance.expertise.Damp squibBefore the new budget was out of his bag, the finance minister kept hinting at a tough line. It was never clear whether this meant a tough one for him (because of political compulsions like having to accommodate Railways Minister Mamta Banerjee) or for the country. However, as a result of all this talk, the country was prepared for a tough budget. It was up to Sinha to walk the talk. He has not. This is a tax budget, with some positive signals on subsidies..In several other areas, Yashwant Sinha has adopted the Humphrey Appleby approach of setting up committees, task forces and expert groups. As a millennium Budget, this is extremely unsatisfactory. The budget estimate for the fiscal/deficit GDP ratio in 2000-2001 is 5.1 percent. The minister´s record of sticking to budget estimates wasn´t so great in 1999-2000. Compared to the budgeted 4.1 percent ratio, the revised fiscal deficit ratio for 1999-2000 was 5.6 percent..The budget assumes a nominal GDP growth rate of 12.2 percent. Inflation is quite low at present and will probably not climb higher than 4 percent in 2000-2001. So one requires a 8.2 percent real GDP growth, but the budget does nothing to stimulate this. Fiscal deficit figures will again go haywire and this either means an inflation or an upward pressure on interest rates and the crowding out of private investments because of government borrowing..No service tax has been imposed now, and there has been no significant movement towards VAT (value added tax), but the peak basic customs duty has come down from 40 percent to 35 percent (with higher reductions for IT, films and diamonds). There more liberal provisions on venture capital funds, and foreign participation in individual companies can now be up to 40 percent and the limit for investing in joint ventures (or acquisitions) abroad has gone up from USD 15 million to 50 million. Defence expenditure has gone up to 3 percent of GDP (the bulk of this is for wages, salaries and pensions, although it also includes enhanced provisions for stores, equipment and aircraft). There is also an unsatisfactory attempt to target food and fertiliser subsidies, and a five-year time frame for phasing out the income tax exemption on export profits has been announced..All in all, not the stuff of a Millennium Budget, nor even of a budget to remember. If you are looking for reforms, better look for them outside the budget.