A package of promises

Finance Minister Jaswant Singh before presenting the Interim Budget on February 3. -

The NDA government presents a package of goodies aimed at certain constituencies in the Interim Budget, in a clear bid to deploy the state exchequer in its election campaign.

A PACKAGE of feel-good proposals for the voters, tailored to suit the "feel good" and "India Shining" electoral theme of the National Democratic Alliance (NDA). That sums up the vote-on-account, or Interim Budget, presented by Union Finance Minister Jaswant Singh on February 3.

The Interim Budget was entirely in keeping with expectations. The abiding charm of the budgetary exercise, particularly the element of surprise that normally surrounds its presentation, was missing this year. The top leadership of the ruling BJP, which had apparently decided to deploy the state exchequer for the party's electoral campaign, had only itself to blame for this. The slew of major concessions that it offered on an almost daily basis since January had left very little for Jaswant Singh to do on February 3. Many of the measures were clearly aimed at appeasing corporate and business interests, not only in India but overseas, and at adding to the feel-good effect.

Jaswant Singh's promises can be broadly classified under three categories. The packages offered in January were seen to have addressed the demands of the elite. The customs and excise duty cuts were primarily targeted at items of elite consumption. The sops offered for air travel and other such measures together entailed a loss of more Rs.12,000 crores to the exchequer. In an obvious attempt to woo a thin but vocal and influential slice of the middle class, Jaswant Singh announced the merger of the dearness allowance with the basic pay for Central government employees. For a government, that had, citing resource constraints, stubbornly refused throughout its tenure to spend on rural employment programmes, even in the wake of a severe drought, this was surprising. The move will imply an additional expenditure amounting to over Rs.3,500 crores. More important, this is likely to add further burden to the finances of State governments at a time when the States are finding it hard even to implement the Fifth Pay Commission's recommendations. It is estimated that the State governments will have to bear an additional burden of more than Rs.10,000 crores as a result of this decision.

The second category comprises promises offered to key segments of industry and vocal interest groups. Although Jaswant Singh knew that the device of an Interim Budget offered little scope for changing the elements of the direct tax structure, he went ahead by making promises. For instance, he promised to extend the concessions on long-term capital gains on securities to 2007. This move was aimed at attracting powerful segments of the capital markets which have been lobbying for concessions. Jaswant Singh also announced that raising the limits of standard deduction and income tax exemption were "under study". This was as good as telling the middle class, especially the salaried category, that if they vote the BJP to power, they would gain. The problem with this approach is that it effectively ties the hands of the incumbent in the Finance Ministry after the elections. Powerful lobbies, for instance, foreign institutional investors, have demonstrated their ability to pressure the Union Finance Ministry to modify policies to suit their interests. It is unlikely that such interests will accept unkept promises.

Another aspect of these promises is that they were targeted at different segments of industry. A whole range of concessions have been offered to various industries. The shipping industry, which has been lobbying for a "tonnage tax" to replace the existing system of corporate tax, has been granted its wish. The sugar industry has been offered concessions, and the powerful sugar lobby has thus been appeased. A downturn in the tea industry has affected millions of small tea growers; the industry has now been promised a subsidy scheme. Fiscal sops have been extended to the power industry. Jaswant Singh has promised to "consider" capital goods manufacturers' pleas for relief. Incidentally, his "mini-Budget" had lowered the tariff barriers on project imports. Critics allege that the sops offered to each segment are often contradictory.

The third set of announcements pertain to schemes and projects that Finance Ministers usually make during the course of Budget presentation. Jaswant Singh has announced a plethora of development, welfare and infrastructure schemes. The problem is that given the nature of an Interim Budget, there is no guarantee that these will be backed by funds. A scheme has been proposed to "revitalise" the cooperative sector. It is to cost Rs.15,000 crores and will be made operational in partnership with State governments. But it is not clear how State governments, many of them already on the road to economic ruin, will participate in implementing the scheme. A clause in the Budget papers indicates that the scheme will become operational after a "revised regulatory framework" is put in place. Jaswant Singh has promised cheaper loans to farmers. Speaking after the Budget presentation, he rued the fact that while car loans were available to buyers at 6 per cent interest, farmers were not able to get a loan even at 14 per cent.

It is evident that public institutions, particularly banks and financial institutions, will bear an overwhelming portion of the burden that arises out of the government's promises. Critics point out that the restructuring of the financial sector has completely negated the role of developmental banking, which was earlier the basic task of public sector banks. They observe that the restructuring process has diminished the presence and role of public sector banks in the rural areas. By its very nature, rural credit needs to be diffused across the country, catering to a variety of needs, including agriculture. Critics of the BJP allege that the promises are hollow because the government has systematically downsized public sector banks.

BUDGET presentation normally offers the Finance Minister an opportunity to highlight the state of the economy. However, there has been criticism that Jaswant Singh abused the opportunity provided by Parliament to pass the vote-on-account, which is mandatory if government activity is not to come to a standstill after March 31. He used the Interim Budget to add further gloss to the India Shining theme. This was done primarily by asserting that the government was well on course to attaining almost 8 per cent growth in consecutive years - 2003-04 and 2004-05. It is important to temper the claim with the fact that back-to-back performance of this magnitude has never been recorded in India since Independence. The Interim Budget also seeks to assure voters that the country's finances are in safe hands, particularly by claiming that the fiscal deficit has been lowered.

For a more sober assessment of matters, it is important to recognise that a deficit of any kind is measured in relation to the size of the economy, as measured for instance the gross domestic product (GDP). Official growth rates of the economy, as estimated by the Central Statistical Organisation (CSO), are increasingly being viewed with suspicion. The government has claimed that the economy is likely to register a growth in excess of 7 per cent in 2003-04. This high growth rate has to be viewed in the light of several factors, such as the poor performance in 2002-03 primarily because of the drought. Moreover, it is now evident that the CSO has been "revising" the GDP growth rate for 2002-03. What this implies is that the low base of 2002-03 will amplify growth in the subsequent year. This amplification has implications for the size of the fiscal and other measures of deficits because such deficits can be bigger without appearing to be very high relative to GDP. This is exactly what has cushioned Jaswant Singh's claim that the fisc is in good health. For instance, the revised estimate of the fiscal deficit for 2002-03, provided by the Finance Minister in his last Budget, was 5.9 per cent; this has now been revised downward to 5.4 per cent. Similarly, Jaswant Singh estimated last year that during the current fiscal year the deficit would be 5.6 per cent of GDP; the revised estimate places the deficit at 4.8 per cent. What this suggests is that some good fortune, caused primarily by the expansion of national income in the current year after the drought of last fiscal year, and some clever arithmetic have contributed to the feel-good factor.

A fortuitous buoyancy in tax revenues during the current year, which incidentally also reflects severe imbalances in revenues, has added to the feel-good factor. Although revenues from income tax have fallen short of budget estimates for the current year by Rs.3,800 crores and excise duties by Rs.4,400 crores, they have been more than made up by the whopping Rs.11,500-crore increase in revenues earned through corporation tax during the current year. Earnings from the sale of telecom licences, which are not likely to recur, contributed an additional Rs.3,200 crores; dividends from public sector undertakings contributed more than Rs.4,000 crores. The savings made by cutting subsidies (mainly on cooking gas, kerosene and food) amounted to more than Rs.5,000 crores. The lower interest rates paid on government borrowings reduced expenditure by another Rs.1,500 crores.

Neither the performance of the economy nor the state of the fiscal situation suggests that these factors can be replicated in the year ahead. For instance, the significantly lower shortfall in excise suggests that all is not well with manufacturing even when the economy is supposed to have grown at a scorching pace. Jaswant Singh's claims that excise revenues would increase by 16 per cent and income tax receipts by 15 per cent appear rather tall ones. The Finance Minister also expects corporation tax collections to increase by 26 per cent. This optimism is basically pinned on the assumption that the nominal growth in GDP (not accounting for inflation) in 2004-05 will be 12.7 per cent, after registering 13.2 per cent in the current year. And this is the key assumption that drives the rest of the numbers in the Interim Budget.

THE government's actions since January have attracted criticism. The Opposition regards events in the last couple of months as amounting to subversion of the budgetary process. Having announced elections, the government, in its capacity as a caretaker of the public exchequer, has to handle national finances with extra care. The vote-on-account is a constitutional provision that is specifically aimed at enabling the government to avoid a financial breakdown. The Constitution regards Parliament as the sole sovereign authority for sanctioning funds out of the public exchequer. The Interim Budget is intended to allow the government to continue drawing funds from the Consolidated Fund of India beyond March 31 if a regular Budget cannot be presented before February 28. A vote-on-account is therefore of limited importance, because it is an emergency provision.

The voters are not innocent of the ways of a government that crafts budgets to suit its electoral agenda. By its very nature, an Interim Budget offers considerable leeway to a government that is desperate to use the exercise in the cause of furthering its electoral ambitions. After all, unlike a normal Budget, it does not entail the incumbent government taking responsibility for its provisions.