Too politically correct

The fiscal deficit/GDP ratio of 3.1 per cent for 2007-08 and revenue deficit of 1.4 per cent apparently satisfy FRBM, and performance is better than in budget estimates (in any case the revenue deficit target would have been missed by at least a year). But on both fiscal and revenue deficit calculations, there is sleight of hand and there is no attempt to acknowledge and rectify this. Computed properly, the deficit is probably closer to 5 per cent of GDP. On these three strands, with good growth and tax revenue figures, there couldn’t have been a better time. Fourth, flagship programmes (Bharat Nirman, mid-day meals, National Rural Health Mission, National Rural Employment Guarantee, Jawaharlal Nehru Urban Renewal Mission) may be fait accompli, but whatever happened to the outlay-outcome exercise? Or was that always meant to be hogwash? Is there any evidence that 6000 government-run ‘model’ schools, Navodaya Vidyalayas, Kasturba Gandhi Vidyalayas and Sarva Shiksha Abhiyan (controlled for the impact of mid-day meals) and even central universities contribute anything towards making India a knowledge-based society? Did one need the Rs 60,000 crore debt relief package for farmers? Let’s state the proposition differently. Some existing public expenditure may be impossible to slash, but does one need fresh ones? And whatever happened to the idea of making public expenditure more accountable and transparent, such as through the targeting of food and fertiliser subsidies? On these, Chidambaram made promises of pilot programmes in earlier budget speeches. Smart cards for PDS in Haryana and Chandigarh aren’t the same thing, and that too is a promise.

No one is unreasonable enough to crucify the UPA because banking laws didn’t change, or pensions and insurance weren’t opened up. However, on the four criteria mentioned above, Budget 2008-09 also fails to deliver. That’s not our problem. Given myopia, let’s be populist and hope for resultant electoral dividends. Populism leading to electoral gains is a doubtful proposition, especially if elections are more than a year away. For urban India, there may be the carrot of the 6th Pay Commission, with a report expected in May 2008. For rural India, one may hope that social security for the unorganised sector will deliver, but that is unlikely, given the track record of national rural employment guarantee, which will now extend to all districts. The after-us-the-deluge and populist mindset pervades this budget. Restated, on the four criteria set out earlier, this budget fails on both transparency in deficit calculations and expenditure. Incidentally, a budget cannot be expected to directly address the growth problem and in 2007-08, we now officially expect growth to be 8.7 per cent, with lower growth certain in 2008-09. Indirectly, satisfaction of the four criteria would also have been beneficial for growth.

How does the budget perform on the two taxation criteria? The key to both are removal of special dispensation and rationalisation. With rupee appreciation hurting and WTO negotiations pending, no one expected peak customs duty on manufactured products to decline. But notice the discretionary mindset there. What’s special about set-top boxes? Why was duty on some life-saving drugs earlier 10 per cent and why have they now become 5 per cent?

Have we now agreed that the revenue neutral Cenvat rate is 14 per cent and that this will apply when there is a transition to GST, with state-level taxes perhaps at 8 per cent? If that’s the argument, why should there be special rates for small cars, two-wheelers and pharmaceuticals, not to speak of cigarettes? And if the argument is that one wishes to stimulate manufacturing, with the rate increasing to 16 per cent once manufacturing recovers, that’s no argument at all. One understands the compulsions behind changing personal income tax slabs. But if asset management services under mutual funds and services by stock changes can be brought under service sector taxation, what’s wrong with doctors and lawyers? Why couldn’t service sector taxation have begun to move towards a value added framework by integration with Cenvat? Why should the Central sales tax at all remain? Why should there be five-year tax holidays in special cases? What’s the rationale for increasing the short-term capital gains tax and continuing with FBT? There is an eventual terminal goal for tax reform, with standardisation, rationalisation and harmonisation and a roadmap for getting there. Every budget should be evaluated on the extent to which it deviates from that roadmap. Budgets since 1991 have tended to stick to this roadmap, with varying degrees of success. Budget 2008-09 not only deviates, it seems to take pride in doing so. It isn’t a post-1991 budget at all. It is a pre-1991 budget and fails on the two tax criteria too.

Look at it in a different way. If you rule out the brief NDA stint, we have had four governments since 1991. In the first three governments, there has always been at least one budget to remember, because it advanced the reform cause. In the present UPA government, there hasn’t been a single memorable budget. Thank God this is UPA’s last budget.

The writer is a noted economist

bdebroy@gmail.com