BUDGET OPTIONS

Print edition : May 23, 1998

There are difficult choices ahead of the Union Government in the formulation of the Budget for 1998-99.

AT first glance, the immediate fiscal decisions required of a new Government appear to be so obvious that they scarcely need repetition. Thus, it is clear that economic activity must be revived, and that a major role here must be played by the government as active spender; that infrastructure (both physical and social) can no longer be neglected and requires urgent and substantial increases in public spending; and that fiscal measures to promote employment generation, including rural employment schemes that simultaneously develop infrastructure, should be high priority. Since all these increased expenditures are not possible without large increases in public revenues, the other aspect of the fiscal question is how to generate more current revenues and how to raise the tax collections of the Central Government. Therefore, increased productive spending and revenue collections should be the obvious concerns of any but the most inept government.

Union Finance Minister Yashwant Sinha arriving at the Parliament House on March 25 to present the Interim Budget.-SUNIL MALHOTRA/ REUTERS

Ineptitude in economic policy-making has been a major feature of the Bharatiya Janata Party (BJP)-led coalition's days in government. Few decisions have been taken, and those that have been announced, give some indication of the Government's confusion and lack of new ideas in this most critical of areas. This was evident from the arbitrary increase in the Minimum Support Price for wheat, which is likely to benefit only a small section of the huge Indian farming community, from the excessive trade liberalisation announced in the new Exim policy, and even from the foot-in-mouth pre-Budget broadsides of the Finance Minister. That this Government is set to continue on the basic track laid by the Congress Government since 1991 in terms of economic agenda now seems likely.

However, the nuclear tests in Pokhran and their economic fallout in terms of sanctions imposed on India by developed nations may have changed the scenario to some extent. The sanctions that have been declared so far are fairly minimal, and by themselves they do not have very serious negative economic implications. But insofar as they can be associated with the displeasure of financial markets, or lead to loss of investor confidence in the economy (which is already rather low for a variety of reasons) they can exacerbate an external economic situation, which is already delicate. The negative consequences that this can have for the real economy are now well-known through the examples in South-East Asia. It is in this manner that the macho muscle-flexing in terms of nuclear capability has definite economic implications.

THERE are essentially two alternative paths that can now be taken by this Government in terms of macro-economic policy, and it is possible to find votaries of both positions within the Sangh Parivar and amongst the BJP's coalition allies. The first would be to seek to consolidate on the jingoistic nationalist sentiment that has been roused by nuclear explosions, by emphasising the swadeshi aspect of the BJP's programme, raising import tariffs substantially and providing more protection to domestic industry, thus benefiting the large industrialists who have been vociferous supporters of the BJP. This would have the added benefit of higher tariff collections, in a context in which something must be done to increase government revenues. As it happens, the scope for increasing tariffs is quite large, since the existing tariffs on most product lines in India are well below the tariff bindings declared to the World Trade Organisation (WTO), and the Government still has some freedom to determine both the time-frame and the pace of even the liberalisation it has already promised.

The other option would be to treat the declaration of nuclear capability as an end in itself and offer carrots of further economic liberalisation to the developed powers in exchange for India's acceptance into the nuclear club. This could be made even more necessary by the threat posed by international finance and the possibility of a whimsical collapse of investor confidence, which can be much more devastating than a few official sanctions. This alternative, therefore, implies continuing with liberalisation policies and extending them to cover areas that have as yet not been much affected, including financial services. It is based on the premise that further liberalisation is both necessary and sufficient to ensure a continued (or even increased) inflow of foreign capital into India, which would then be used to finance the growth process.

There is a third option, which involves increasing direct taxes - both through higher rates (to be on a par with most of Asia rather than well below as at present) and through more stringent enforcement, and using the resources gained in this way to increase public expenditures of the kind outlined above. While this may appear to be the most sensible path, it is unlikely to be followed, given the political and economic composition of this Government and its backers.

In fact, the indications so far suggest that the Government is likely to choose the second option of giving in on important economic matters in order to glory in its newly declared position as a sub-regional nuclear bully. This may explain why Yashwant Sinha even suggested a few weeks ago that he was considering a second Voluntary Disclosure of Income Scheme (VDIS). The idea is absurd in the extreme, but it makes some sense if it is believed that the Government is incapable of raising taxes or getting more revenues through any other means. Of course, the final decisions on the Budget depend on the domestic politico-economic configurations as well as external considerations. It is depressing, however, that the most sensible alternatives also appear to be the least likely to be followed.

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