IN an economy characterised by high levels of concentration in ownership of all productive assets, and dominated by private and commercial interests, the government's budget cannot clearly be expected to bring about any radical transformation. It would thus be fair to characterise the media hype over the budget-making exercise of the Government of India on the eve of, during and shortly after the presentation of the Union Budget to Parliament as being largely misplaced. Nevertheless, even given the constraints of the broader economic structure and the fact that the budget is only one of several instruments of economic policy available with the government, the Union Budget is sufficiently important to be subjected to critical scrutiny.
The Union Budget was expected to address important economic issues facing the country, some aspects of which were highlighted in the Economic Survey of the Government of India. The year 1998-99 had been a year of slow growth, although a revision of GDP figures using 1993-94 as the base year enabled the Government to claim a quick estimate of GDP growth for 1998-99 at 5.8 per cent. In particular, industrial growth of 3.7 per cent was dismal and export growth at 2.6 per cent even more so. The Survey had also drawn attention to a serious fiscal crisis, and stated that the current economic situation was not significantly better than in 1991-92. Given this background, it was expected that the Union Budget would address the issues of stimulating economic growth and overcoming the fiscal crisis, even while seeking to contain inflation. In the event, Yashwant Sinha's second Budget has failed to address these issues seriously.
Throughout the 1990s, the tax to GDP ratio has been going down. Any effort to overcome the fiscal crisis had to be based on widening the tax base and taxing the well-to-do more effectively. The Budget has done little in this direction. True, there is a 10 per cent surcharge on corporate tax, bringing the effective corporate tax rate to 38.5 per cent. But this is hardly anything to write home about. The other direct tax measure, a 10 per cent surcharge on tax on individual incomes for assessees with annual taxable income in excess of Rs.60,000, penalises the tax-paying, lower end salary and wage earners while letting off the higher income brackets lightly. The indirect tax proposals, together with the hike in diesel prices, coming on top of pre-Budget price hikes on petrol, LPG and essential commodities sold through the public distribution system, and the hikes in railway and postal rates, add up to a hefty burden on the common people. These measures, together with the huge uncovered deficit, are bound to be inflationary.
Turning to expenditures, the total Plan expenditure at the budget estimate of Rs.77,000 crores for 1999-2000 is not greater in real terms than the 1998-99 budget estimate of Rs.72,002 crores. The outlays are lower even in nominal terms in the case of several sectors such as rural employment and poverty alleviation, steel and mines, petroleum and natural gas, chemicals and fertilizers and so on. There is no attempt to stimulate the economy through badly needed public investment in such essential areas as infrastructure. The budget estimate of Central Plan outlay is in fact lower in nominal terms than the corresponding figure for 1998-99.
Despite massive pre-Budget and budgetary levies, and more or less stagnant Plan expenditures, the overall deficit is slated to rise considerably. This is primarily the fruit of years of resort to market borrowing instead of higher direct taxes on the rich, leading to a situation where interest payments at 4.4 per cent of GDP account for the bulk of the revenue expenditure, even as subsidies have declined from 2 per cent of GDP in 1991-92 to just 1.2 per cent in 1999-2000, and the tax to GDP ratio from 10.9 per cent to 8.8 per cent over the same period.
This indeed is the crux of the so-called fiscal crisis: a refusal to tax the rich. As a consequence, the axe falls on the subsidies that go to the poor and on badly needed real capital formation, as the Government tries to meet the Fund-Bank targets in respect of their holy cow, the fiscal deficit. Yashwant Sinha's second Budget toes the same Fund-Bank line. If one takes the 1990s as a whole, the capital expenditure of the Government of India has declined from 5.5 per cent of GDP in 1990-91 to hardly 3 per cent in 1998-99.
Yashwant Sinha's revenue projections assume a real GDP growth of 7 per cent and an inflation rate of 5 per cent for 1999-2000. The projected real rate of growth is most unlikely to be achieved. By the time the next budget comes up for presentation, Yashwant Sinha's deficit figures will be as much if not more off the mark as they were during the financial year that has ended. It only needs to be recalled that Yashwant Sinha's figures of fiscal deficit as a percentage of GDP at 4.5 per cent for 1998-99 (revised estimate) and 4 per cent for 1999-2000 (budget estimate) have been arrived at by revising GDP figures upwards and excluding 75 per cent of the massive small savings collection from the deficit figure, a departure from practice. The fact that even the doctored figure for 1999-2000 assumes public sector disinvestment to the extent of Rs.10,000 crores is ominous. Given the dreadful state of the stock market, it implies either distress selling or once again forcing public sector enterprises into crossholding of stocks, denying them the opportunity to use their surplus funds more productively.
The likelihood of runaway deficits carries the danger of a big upsurge of inflation, which in any case has been at a much higher level than the figure of 5 per cent based on what the wholesale price index suggests, given the rise of 17 per cent in the consumer price index for industrial workers during 1998-99.
Yashwant Sinha's budget speech has been long on rhetoric, especially on panchayats and decentralisation. But he has in fact cut allocations in real terms for sectors which would typically come under the panchayat agenda, such as health, rural employment and poverty alleviation. At the same time, he has taken recourse to surcharges on taxes which unlike taxes, accrue wholly to the Union Government. 'Decentralisation in words, centralisation in deeds', seems to be the motto here.
Taking an overall view, it is clear that the Union Budget for 1999-2000 will neither stimulate growth nor control inflation, but will contribute to greater inequality. It would, at best, please the stock market and the foreign investor, but this is no recipe for growth, equity or reduction of poverty and unemployment.
In a word, Yashwant Sinha's Budget is long on rhetoric but short on all other counts.
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