The Interim Budget has revealed the true state in which P. Chidambaram had left the country's finances.
THE timing of the elections had made a vote-on-account inevitable. With a Prime Minister in place only by the middle of March, parliamentary approval for expenditures needed to carry on the business of government had to be obtained before the vote-of-confidence. Even if the Bharatiya Janata Party and its allies were certain of winning the confidence of the House, they needed time before assessing the state of the nation's finances and presenting a budget that reflected their priorities. Finance Minister Yashwant Sinha took the opportunity and a leaf out of Manmohan Singh's book to present an 'Interim Budget', which sounds more significant than what it actually is - an exercise which cannot win approval if it seeks to impose new taxes or undertake expenditures rendered routine by history.
However, Yashwant Sinha did manage to throw in one 'initiative' into the vote-on-account. The outgoing Finance Minister, P. Chidambaram, had promised to transfer 77.5 per cent of the collections made till end-December 1997 under the much-touted Voluntary Disclosure of Income Scheme (VDIS). He justified that partial transfer on the grounds that deferred payments under the scheme would flow in slowly and are best shared in 1998-99. In practice, the partial transfer would have allowed him to retain in his kitty funds which were not rightfully the Centre's, and present a better picture of "revenues" and the deficit in 1997-98 than was the case. Yashwant Sinha chose to devolve to the States the required 77.5 per cent of VDIS collections for the full year 1997-98, taking the sum involved from Rs.4,379 crores to Rs.7,594 crores. This not only helped the BJP please its allies from the States, whose assistance it needed when the crucial confidence vote was taken, but also allowed it to reveal the true state in which Chidambaram had left the country's finances.
That state is parlous indeed. If we exclude the Rs.10,050 crores collected through the VDIS, which did not feature in the budgeted figures, the gross tax revenues of the Centre stood at Rs.132,420 crores in 1997-98 as compared with the revised estimate of Rs.132,319 crores in 1996-97 and an originally budgeted Rs.153,647 crores for 1997-98. That is, despite the growth in nominal income by 10 per cent or more in 1997-98, tax revenues have been virtually stagnant between 1996-97 and 1997-98, pointing to a significant fall in the tax-GDP ratio in the Union Budget. If the tax-GDP ratio had remained the same, we should have expected that gross tax revenues would have risen by an additional Rs.13,000 crores. The decline in the ratio is the result of large shortfalls in tax revenues under most major heads during 1997-98. Income tax collections, which were budgeted to yield Rs.21,700 crores are down 14 per cent at Rs.18,700 crores; customs duties budgeted at Rs.52,550 crores are down 22 per cent at Rs.41,000 crores; and Union excise duties budgeted at Rs.52,200 crores are down by close to 9 per cent at Rs.47,700 crores.
But that is not all. Reports coming on March 31 suggested that income tax collections are likely to touch only Rs.17,000 crores, which is way below the figure provided in the Interim Budget. If that figure is right, collections from both income tax and the VDIS, which offered an unprecedented set of concessions to tax defaulters who declared past black incomes, just add up to the budgetary estimate for income tax alone.
THE shortfalls in tax collections are owing to three factors. The first one is the across-the-board cut in direct and indirect taxes resorted to by Chidambaram in pursuit of his belief in the non-existent "Laffer curve", which is supposed to show that tax cuts lead to larger revenues. The second factor is, the recession in industry which has affected domestic production and therefore imports, resulting in a fall in Customs and excise duties. This has occurred despite the devaluation of the rupee which would have increased the rupee value of a given volume of imports, and therefore the rupee base on which customs duties would have been calculated. The third factor is a decline in the international prices of oil, which aggravated the fall in customs duty collections.
Chidambaram could argue that the last of these was an unforeseen event which he could not be faulted for. But the first two reasons for the decline in tax revenues is clearly the result of his desire to bend over backwards and provide the tax-paying rich with concessions. These concessions have had three consequences. First, the point of view advocated, on the basis either of just poor economic knowledge or of plain duplicity, that tax concessions to the rich would yield higher revenues, has once more proved wrong. The Government's resource mobilising capacity has virtually collapsed, and the state of the stock market that has meant disinvestment of prime public equity has not helped neutralise that collapse. In fact, 'receipts' from disinvestment are, at Rs.906 crores, less than a fifth of what had been budgeted for under this head.
Secondly, with the bonanza handed over to the tax-payers in a year when revenue expenditures were expected to rise substantially because of the inevitable acceptance of the recommendations of the Pay Commission, the Government has had to curtail substantially its capital expenditures, resulting in a recession in the non-agricultural sector. Not only is budget support for the Central Plan, at Rs.33,629 crores, Rs.2,500 crores short of the relatively low budgeted figure, but virtually there is not a single significant sector where outlays have fallen short. These shortfalls, which would not have mattered if private investment had 'responded' to the tax incentives as expected, explains in part the deceleration in growth last year. That deceleration in turn has adversely affected direct and indirect tax revenues. Slower growth induced by spending cuts necessitated by lower taxes have eroded the resource-mobilising capacity of the Government even further.
Thirdly, despite all this, and despite the launch of the ethically reprehensible VDIS, the fiscal deficit has risen to 6.1 per cent of GDP, as compared with the 4.5 per cent budgeted for by Chidambaram in his 'bravado budget', that has won him little other than a nomination as Asia's best Finance Minister of the year from a glossy representing the interests of international finance.
WHAT is most damaging is that almost all of this increase in the fiscal deficit is attributable to an increase in the revenue deficit of the Government rather than an increase in capital expenditures financed with additional borrowing. The deficit on the current account of the Centre's Budget rose from 0.6 per cent of GDP in 1996-97 to 1.5 per cent last year. What we have here is another instance of a failure of perception on the part of the previous Finance Minister. Through his exhortation to his tax-paying constituency that people should spend till they drop, he made it clear that he expected that a combination of tax concessions and higher salaries would spur a consumption-led boom. That, we know now was not to be.
Growth is related not to the current expenditures of the state or the post-tax incomes of the private sector, but to the capital expenditures the state can sustain. The corollary is that if Chidambaram had the gumption to reduce his revenue deficit with additional taxes and less tax concessions, but increase his fiscal deficit with larger borrowing aimed at raising capital expenditure, he and, more important, the economy would have gained much more from his budgetary exercise. What the revised figures for 1997-98 have done is to call the bluff on the kind of 'voodoo economics' promoted in recent times. That kind of economics suggests that more concessions to business and less revenues for and expenditures by the state is the appropriate panacea for a nation searching for a strategy that delivers growth with a degree of equity.
Chidambaram and his advisers in the Finance Ministry obviously took cognisance of these conclusions delivered by an exercise in school-boy arithmetic, even if they had not digested it in full. As a result, in one more instance of the use of sleight of hand that has come to characterise the style of functioning of the Finance Ministry in recent years, they chose to retain, on specious grounds, part of the money derived from the VDIS as revenues on the current account of the government's budget. This would have inflated the 'net' tax revenues of the Centre, and kept both its revenue and fiscal deficits down to levels that are acceptable, even if not befitting of a prize-winning Finance Minister.
Unfortunately for them, circumstance and politics ensured that this was not to be. Yashwant Sinha's decision to use the opportunity of a vote-on-account to present an interim budget has helped reveal all. This despite the fact that Finance Ministry officials decided to do away with a separate document on the Revenue Budget, which makes comparisons between actual 1996-97, budgeted 1997-98 and revised 1997-98 revenue collection figures easier to make than the revised budgetary documents bundle they have decided to provide allows.
GIVEN the figures, Yashwant Sinha has a tricky task at hand. Taxes are not buoyant enough, while current expenditures would remain high. Demands from the BJP's allies for expenditures in different States would have to be met.
Interest payments on past debt are an unavoidable burden. And higher defence expenditures are a likely outcome of the 'militarist agenda' of the BJP. In the face of these likely expenditures, Yashwant Sinha has chosen to reveal half his hand by declaring that it is necessary to reverse the rise in the fiscal deficit. If revenue expenditures rise while the fiscal deficit is reined in, there are only two options: either incomes on the revenue account must rise to reduce the revenue deficit, or capital expenditures must be put on hold. Reversing the decline in the direct tax-GDP ratio is bound to be difficult for a Government with an unstable 'majority' that values the pre-election support it has won from big business.
This leaves only indirect taxes as a source of revenue. Much has therefore been made of the fact that the Finance Minister chose to single out the shortfall in customs revenues in his Budget speech. Would the BJP, with its swadeshi rhetoric, opt for a hike in customs tariffs, so as to pursue with one instrument the twin objectives of higher revenues and greater protection for domestic business? Yashwant Sinha, interestingly, attributed the shortfall in customs duties to "lower volume and lower unit price of imports" rather than to low tariffs. So there is too little to indicate that his full Budget would reverse the moves undertaken in recent times to fulfil the overgenerous commitments made by previous governments to the World Trade Organisation.
If revenues do not rise and the fiscal deficit is to be reduced, then capital expenditures would have to be reined in. But the BJP has repeatedly promised much by way of new infrastructural investment, which requires either a hike in taxes or an even higher fiscal deficit. The fact that Yashwant Sinha has chosen to be ambivalent on this score suggests that he is a 'liberaliser' among the swadeshis, who is more concerned about the fiscal deficit than with the need to revive capital expenditures by the state. All this would make the budgetary exercise as difficult as the Ministry-making one. But for the moment, it is he rather than Chidambaram who has had the last 'Laffer'.