BUDGET 2005

Downsize and go off-Budget

C.P. CHANDRASEKHAR

Caught between the desire to see India as a globalising economy with a fiscally prudent government and the compulsion to pay obeisance to goals rendered imperative by democracy, coalition politics and the National Common Minimum Programme, P. Chidambaram emerges more as a manipulator of accounts than as a prudent Finance Minister.

RAJEEV BHATT

Finance Minister P. Chidambaram at Parliament House.

TWO factors appear to have influenced Finance Minister P. Chidambaram when he finalised his Budget speech for 2005-06. The first is his desire to declare that he intends to not just keep economic reforms on track, but accelerate its pace. The second is the need to assure the Congress' partners in the ruling United Progressive Alliance (UPA) as well as its allies, who have been disappointed with and critical of the government's unwillingness to implement its promises made during the 2004 election campaign and elaborated in the National Common Minimum Programme (NCMP).

Part A of the Budget speech was clearly driven by the second motivation. It begins with the recognition of the mandate delivered by the Indian electorate in 2004. That mandate, the Finance Minister declared, besides being a vote for a new leadership and government, was a call for policies involving "a new focus on the common citizen who is at the centre of all politics and governance".

Since there is no representative common citizen in a heterogeneous and unequal society like India's, the reference must be to the representative unit of a majority of citizens who have thus far not been the focus of economic policy. Among those who constitute that majority, in the view of the Finance Minister, are the farmer, the student, the self-employed woman, and the labourer in search of work and food, whose problems the NCMP seeks to address. While detailing what the government has done for these sections in the financial year just concluding, he claims to be stepping up substantially programmes directed at them in 2005-06.

This realistic recognition of a democratically determined focus for policy is indeed welcome. Judging by Part A of the speech that recognition also seems to have influenced budgetary allocations. Employment, education, health, nutrition, drinking water, sanitation and rural infrastructure, and the development of marginalised sections such as the Scheduled Castes and Scheduled Tribes, women, children and the minorities all receive a mention in the speech and, in some cases, increased allocations as well.

The real issues are: (i) whether these concerns and allocations are seen as necessary or as unavoidable constraints which a "technocrat" Finance Minister must contend with; and (ii) whether the increase in allocations to sectors that reflect sensitivity to "human face" concerns is significant or a sign of mere tokenism. The belief that "human face" concerns are constraints rather than causes is indeed visible in the Budget.

The principal priorities that drive the Finance Minister are clear from his speech. He would like to see India as a globalising economy with a fiscally prudent government. He would like to look the Chinese Finance Minister in the face and declare that India too gets close to $60 billion of foreign direct investment (FDI) in a year - not less than a tenth of that, which is the case. He would like the largest bank in India to rank among the top 20 in the world, rather than stand at a lowly 82 in the global pecking order. He would also like one or more universities in India to be ranked alongside Oxford and Cambridge or Harvard and Stanford, rather than appear to be their much poorer Third World cousins.

These are the objectives he would like to realise, even while paying obeisance to some of the more mundane goals rendered imperative by democracy, coalition politics and the NCMP. These include: shifting the policy focus in favour of agriculture, providing universal access to quality education and health care, and ensuring a minimum of 100 days of employment in a year to one person in each household. But given the current state of political play inside the Congress, within the UPA, among its alliance partners and outside, some recognition of the original agenda of the UPA and the Congress is called for.

Chidambaram flags this recognition with specific numbers reflecting increased allocations. Some of these numbers are indeed significant, as in the case of the Sarva Shiksha Abhiyan, which gets a non-lapsable allocation of Rs.7,156 crores for 2005-06 as compared with an actual expenditure of Rs.4,753.63 crores in 2004-05. New allocations, totalling Rs.980 crores, for a horticulture mission and micro-irrigation are considerable. And there are areas like the provision of drinking water, too, where the increase in allocation is sizeable. But in many cases, and especially in the "big areas", the numbers neither reflect a budgetary initiative of the Finance Minister nor amount to any significant level.

Thus, to prove his commitment to the welfare of the `common citizen' in rural India, he claims that the disbursement of credit to agriculture would touch Rs.1,08,500 crores as against the Rs.1,05,000 crores targeted in the Budget for 2004-05. What should be obvious is that this is not a budgetary measure, but an off-Budget initiative reflecting, if true, the use of the lever of directed credit, which the Finance Minister wants to give up as part of the financial liberalisation programme. What is more, it is known that credit to agriculture has been redefined to include credit provided to agribusiness firms as well as investments in rural development bonds of the government. Thus even the rise in credit may not be all pro-poor.

The other area where off-Budget means are to be used to finance expenditures is in closing the so-called "infrastructure deficit". The Finance Minister intends to establish a Special Purpose Vehicle (SPV) which would draw on borrowed rupee and foreign exchange resources to build roads, ports, airports and tourism infrastructure. When spend you must but keep fiscal deficit in check, the best way is to move expenditures off the Budget and claim to be fiscally "prudent", whatever that may mean.

WHAT about the budgetary allocations themselves? The Finance Minister claims that on priority sectors and flagship programmes falling under the NCMP, he proposes to provide an additional sum of Rs.25,000 crores. What the term "additional" means is unclear given the fact that the total budgetary expenditure of the Central government is expected to rise to Rs.5,14,343.80 crores or by just Rs.8,553 crores relative to the revised expenditure estimate for 2004-05.

Even more disappointing is the allocation for flagship programmes. The NCMP promised that the UPA would increase public spending on health to at least 2-3 per cent of GDP over its five-year term. Given the nominal GDP estimates for 2005-06 implicit in the Budget, this amounts to between Rs.70,000 crores and Rs.1,05,000 crores. The Finance Minister makes much of the increase in total allocation to the Department of Health and the Department of Family Welfare from Rs.8,420 crores to Rs.10,280 crores. But given the distance to be travelled in terms of its own promise, this increase is obviously insignificant.

Most disappointing is the allocation for the National Food for Work Programme (NFFWP) launched in November 2004, which the expenditure Budget document describes as "a step towards the commitment to an employment guarantee programme". The expenditure Budget document indicates that Rs.6,408 crores was spent on rural employment during 2004-05. This is to be increased to Rs.9,000 crores in 2005-06, including an allocation of Rs.5,400 crores for the NFFWP. However, in his speech, the Finance Minister indicated that because of an allocation of 50 lakh tonnes of foodgrains, the total allocation - comprising cash and food components - for the NFFWP is Rs.11,000 crores. This implies that the government is moving a significant part of the expenditure on the NFFWP off the Budget. Yet, the total allocation for the programme is far short of the estimates of the sums required, which vary between Rs.25,000 crores and Rs.45,000 crores, to implement it effectively.

In sum, while allocations in some areas have indeed been increased, for crucial initiatives such as a greater rural focus, improved health and, above all, employment guarantee, they are inadequate or meagre. What is more, a substantial part of even these allocations have been funded not through increased budgetary provisions but through off-Budget means.

The reason for this "downsizing" of the role of the Budget is that the Finance Minister has continued with "reform" policies that reduce revenues and restrict the spending power of the government and is obsessed with proving that he is fiscally prudent and meeting the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act. In particular, despite India's appallingly low tax-GDP ratio, he has continued with the process of reducing taxes to liberalise trade, provide incentives to the private sector and spur domestic demand. He has reduced the peak rate of customs duty on non-agricultural products from 20 to 15 per cent, reduced import duties on a host of imports, especially capital goods, cut excise duties on polyester filament yarn, tyres and air-conditioners from 24 to 16 per cent, adjusted other excise duty rates downwards, and provided major concessions with regard to taxes on both corporate and personal incomes.

To neutralise partly the impact of these concessions on the revenue side of his Budget the Finance Minister has resorted to two means: first, to impose a set of new taxes, the extent of projected revenue generation from which is not specified; second, to make completely untenable projections of what the actual revenue generation would be. The two major tax initiatives are the fringe benefits tax on benefits provided individually or collectively to employees by firms; and a transactions tax of 0.1 per cent on cash withdrawals of Rs.10,000 or more from banks in a single day. While the revenues to be generated from these measures are not provided, the Finance Minister has already agreed to dilute the provisions of the fringe benefits tax and is likely to go back on the withdrawals tax.

Yet, the Budget is based on expectations of a 33 per cent increase in corporate tax revenues, a 30 per cent increase in income tax revenues, and a 21 per cent increase in revenues from excise duties. The presumption obviously is that tax concession would lead to both greater income buoyancy and substantially greater compliance. Neither of these has been realised in practice in the past when taxes have been cut. Nor are they likely to be realised in 2005-06.

Yet Chidambaram needs to provide these tax concessions, because of his desire to prove that he is pursuing a programme of accelerated liberalisation. This desire is also reflected in the elaborate references to proposed liberalisation of regulations governing the banking sector, references to concessions aimed at attracting foreign investment, including in the sensitive mining and pension funds sectors, and references to the need to make India a global player.

The real problem for the Finance Minister is that while pursuing this two-track strategy of delivering on his own goals and that incorporated in the NCMP, he is bent upon establishing that he is fiscally prudent. This is problematic since the government has now clearly defined the nature of such prudence in the form of targets incorporated in the Fiscal Responsibility Act, since the Budget has provided major tax concessions, since all allocations cannot be increased off-Budget and some must be shown in the Budget and since the Twelfth Finance Commission (TFC) has increased the share of gross tax revenues to be transferred from the Centre to the States.

The FRBM Act requires a reduction in the revenue and fiscal deficits, of 0.5 and 0.3 percentage points respectively, every year. According to the revised estimates for 2003-04, revenue deficit was 3.6 per cent and fiscal deficit 4.8 per cent of GDP. By bringing down the former to 2.7 per cent in 2004-05, the Finance Minister claims to have been able to deliver almost all of the reduction required for two years in a single year. Fiscal deficit, too, has come down by half of a percentage to 4.5 per cent of GDP. Thus, according to Chidambaram, while faithfully attempting to implement the mandate of the NCMP and still pursing economic reforms, he has been able to remain on the path of fiscal consolidation.

WHAT is most puzzling about the Budget is its ability to meet all of its objectives - of going global, of meeting developmental goals and of ensuring fiscal prudence - with minor violations. How has the government been able to pull it off?

As noted earlier, the Finance Minister has partly dealt with these problems by concealing the size of the fiscal deficit in 2005-06 by transferring part of the expenditure off-Budget and by making extremely optimistic projections with regard to revenue generation. But even that has proved inadequate. So he has misused a clause in the Twelfth Finance Commission's recommendations that provides States the option to borrow directly from the market rather than from the Central government to finance their Plan expenditures. Thus far this sum was provided as the loan component of the grant-cum-loan transfers to be made by the Centre to finance approved Plan expenditures of the States. However, this is just an option that is now open to the States. But, if the States choose to turn to the Centre for such loan finance, then they would have to be provided this sum and this would show itself in allocations from the Central Budget that need to be financed with Central borrowing. This would influence the expenditure and the fiscal deficit of the Centre.

However, misusing the option provided by the Finance Commission, the Finance Minister states that "Plan expenditure for 2005-06 is estimated, on a like-to-like basis at Rs.1,72,500 crores. However, the Budget shows Plan expenditure at Rs.1,43,497 crores, and the balance amount of Rs.29,003 crores will be raised by the State governments directly, in accordance with the recommendations of the TFC." Thus with a single sentence the Finance Minister has removed an allocation of more than Rs.29,000 crores or more than 0.8 per cent of GDP off the Budget and helped reduce the Central fiscal deficit by that amount.

Because of this manipulation, Central assistance for State and Union Territory Plans, which stood at Rs.54,858 crores in 2004-05 (Revised Estimate), is projected at just Rs.33,112 crores in the budgetary estimates for 2005-06. This "gain" of Rs.21,746 crores amounts to more than three-fourths of the proposed increase in budgetary support for the Central Plan and 87 per cent of the increased allocation for implementing the NCMP. Chidambaram may consider himself smart for using optimistic revenue projections, off-Budget provisions and the TFC to produce a Budget that advances reform, takes account of the NCMP (however partially) and yet meet the requirements he has set for himself through notification of the FRBM Act. But that is because he presumes that those perusing his Budget documents are easily misled. Since they are not, he emerges more as a manipulator of accounts than a prudent Finance Minister.

He would indeed have been smart if he had declared that to realise even his limited and skewed goals the FRBM Act must go, and proved this through a numerically realistic budget.

Printer friendly page  
Send this article to Friends by E-Mail