For the middle-class constituency that was created and nurtured by the decade of reforms, this year's Union Budget has very little to cheer. And for the poor there is even less.
FINANCE MINISTER Yashwant Sinha's fifth Union Budget clearly signals that it is payback time for the "Great Indian Middle Class", whose revolution of rising expectations drove the liberalisation drive of the 1990s. The Budget represents a pincer movement on the middle class - crucial savings incentives have been diluted, interest rates on small savings have been pared down, and taxes on personal earnings hiked. Effectively, the message is that the consumption boom that created an illusion of economic growth in the 1990s provided little returns to the government; it only succeeded in widening the size of the hole in the general exchequer. Now is the time to reverse the onus, to transfer part of the earnings that propelled consumption through the last decade into government coffers.
The Budget failed to enthuse the markets for reasons that are all too evident. Two of the more important revenue raising measures in the Budget have been the reimposition of the dividend tax as payable by the receiver of dividend and the raising of the surcharge on personal and corporate income taxes. Using the rhetorical licence that the Budget speech provides, Yashwant Sinha somewhat disingenuously highlighted his decision to do away with the surcharge that has been in place since his first Budget on various grounds, the most recent being the imperatives of providing relief to the sufferers of the Gujarat earthquake last year. He has, however, found in the precarious security situation on the borders a reason to impose an even heavier surcharge. Since there is little likelihood of an imminent improvement in the fiscal situation, it could well be asked why the man who earned the epithet of "Surcharge Sinha" for his all too willing recourse to this expedient, should not make the surcharge a part of the tax structure. The reasons obviously, are no more than ideological.
Industry associations reacted favourably to the first part of the Budget speech, where a certain intent to relax exchange controls, move towards capital account convertibility and press ahead with structural changes in the management of infrastructure sectors was evident. But after the taxation proposals were unfolded, they were left clutching on to the small consolation that their expectations had anyway been modest to begin with.
Keeping the last decade's record in mind though, the Finance Minister should perhaps learn to consider the response of industry associations and the markets as an inverse indicator of the quality of his budgetary calculations. "I could have been adventurous and earned your approbation," he said in his first post-Budget interaction with an industry association. But that, he said, would have been an ephemeral gain, since "two or three days later you would have realised it was a bad budget".
Evidently, Yashwant Sinha had the experience of last year in mind when he provided this rather aggressive defence of his budgetary effort.
Earlier derided for his all too easy recourse to administered price hikes and surcharges, he succeeded last year, in his fourth attempt, to win the endorsement of the markets by seemingly signalling a return to the "supply side" philosophy of cutting taxes and betting on economic buoyancy to augment revenues. The response of the markets was euphoric, but brief. They were laid low in little time by the rampant irregularities that had been brewing under the concocted promise of an information technology boom. And when the accounts for the year were in, the calculations of tax buoyancy were proven completely hollow. Yashwant Sinha's calculations on revenue accruals were proven off target by over 12 per cent - the most massive miscalculation of the last decade, except for that other famous bet on the supply side, P. Chidambaram's "dream budget" of 1997-98.
When all the minutiae of the Budget are examined, it is clear that the main task of raising revenue was relatively easily addressed. The increased surcharges on personal and corporate income taxes are expected to fetch Rs. 2,750 crores and the diminished tax rebates offered under Section 88 for savings instruments would augment revenue accruals by Rs. 1,500 crores. These two together would in other words contribute the bulk of the Rs. 6,000 crores expected under direct taxes.
ON the indirect taxes side, the Finance Minister has, perhaps as a parting gift to the petroleum industry prior to the dismantling of the administered price mechanism (APM), proposed to double the cess on domestic crude oil to Rs.1,800 a tonne. This alone is expected to yield the government Rs.2,700 crores of the total indirect tax gains of Rs.6,500 crores. The surcharge on petrol sales and the extra levies on liquefied petroleum gas (LPG) and kerosene will account for a large part of the additional collections under indirect taxes. Once a milch cow for the government under the APM regime, the petroleum sector evidently will continue to be so, decontrol notwithstanding.
By extending the service tax to 10 new sectors, notably life insurance, the Finance Minister would be hoping to add Rs.1,400 crores to his revenues in 2002-03. This would undoubtedly add to the cost of provision of these services and for life insurance policy holders, would constitute another negative incentive for savings.
Having raised revenues by a significant amount through a relatively small number of devices, the Finance Minister has been able to tinker around with rates across a broad front. The peak rate of customs duty has been reduced to 30 per cent and a number of duty concessions afforded to imports in the electronics, computers and telecommunications sectors. The total revenue sacrificed on the customs duty front, if the Budgetary calculations hold up, would be Rs. 2,200 crores. But if the underlying causes of the massive shortfall in customs duty collections this year are factored in, the revenue loss could be considerably more.
Industry has good reason to be glum. But at his meeting with top industrialists shortly after the Budget, Yashwant Sinha was unrepentant. The singular concession he sought to highlight was the additional depreciation provision of 15 per cent for plant and equipment, which he insisted, should constitute an investment stimulus. That apart, he claimed, specific incentives had been handed out at the sectoral level, notably in textiles. With the Multi-Fibre Agreement (MFA) slated to be phased out by 2005, the Indian textiles industry was likely to come under pressure to maintain its export levels, as also its preemptive claims to the domestic market. A number of excise duty concessions handed out this year, in the estimation of the Finance Minister, should serve this purpose.
Defending his parsimony with tax concessions, Yashwant Sinha outlined the tough choice he faced: "What I would have given up in taxes, I would have had to go to the market and borrow. It would have crowded the market (and) the 'feel good' factor would have evaporated faster than last year." The Finance Minister may find that if a broad-based recovery does not take place, his budgetary calculations could well go askew. He has calculated on a fair degree of revenue buoyancy in the year 2002-03. Excluding the States' share, the Central government's tax revenue, he has estimated, will increase by 21.5 per cent in the year to come, over the revised figures for 2001-02. This is a degree of buoyancy that has been rarely achieved in the last decade and seems to depend now, more than ever, on a sustained improvement in economic prospects in India and the world.
Apart from the service tax on life insurance, another blow that the household sector would have to cope with is the slashing of interest rates on small savings by 50 basis points (or 0.5 percentage points). This constitutes a double blow since the tax exemption granted on these instruments has also been considerably diluted.
The explicit purpose of this move is to reduce the burden on the government from its massive borrowings. Ironically, however, the much feared "crowding" in the market for funds is yet to manifest itself despite the government's borrowings exceeding estimates over a number of years. The demand for credit has been sluggish because of overall recessionary trends.
An unstated purpose of the savings rate reduction is obviously to induce middle-class households to spend more or to shift their attentions to the capital market. The former is of course evocative of Chidambaram's famous pre-Deepavali exhortation to consumers in 1997, during his tenure as Finance Minister, to "go out and spend". That, he assured them, was the patriotic thing to do, to impart a much-needed stimulus to the economy. Consumers who believe in the cathartic value of spending as an antidote to the uncertainties of an economic recession, may well heed the implicit advice in this year's Budget. But they are unlikely to be a substantial enough number to make a difference to overall economic performance. As for prospective investors in the stock market, they are unlikely to be reassured by the Finance Minister's eloquent silence on the scandal last year that shook the markets and the country's largest mutual fund, the Unit Trust of India.
Significantly, there has been no budgetary provision to restore the UTI's pivotal US-64 scheme to some semblance of viability after last year's turmoil. In his speech, Yashwant Sinha seemed to just gloss over this issue, announcing that a "package of measures for reforming the US-64 scheme" had already been put in place. Whether this rather bland assurance will serve to shore up investor confidence is unclear. The UTI has reportedly been facing massive redemption pressures since January, and has had to liquidate its holdings in several blue-chip scrips to meet the demands placed upon it. And with the capital markets responding in a markedly adverse fashion to the Finance Minister's latest budgetary offering, there is unlikely to be the buoyancy that would enable UTI to stanch the outflow.
ON the expenditure side, interest payments continue their untrammelled rise and would amount to almost 40 per cent of non-Plan expenditure in 2002-03. The defence budget has been raised 14 per cent in nominal terms, and would aggregate a substantial Rs.65,000 crores. The fertilizer subsidy has been slashed and the price of urea has gone up by 5 per cent. All other sectors, notably the social sectors which have borne the brunt of the fiscal squeeze through the 1990s, have been afforded rather niggardly outlays.
Rural development is a sector where there was a degree of unanticipated munificence in 2001-02. Against a budgeted Plan outlay of Rs.9,205 crores for the Department of Rural Development, the revised outlay was Rs.10,606 crores. This increase was largely on account of additional investments being made in rural employment. Against a budgeted figure of Rs.2,925 crores, the actual outlay in 2001-02 was Rs.4,225 crores, which includes Rs.800 crores for a food-for-work programme. However, this increase was achieved partly by slashing the outlay for two social welfare schemes - the National Social Assistance Programme and the Annapurna scheme for free food supply to vulnerable sections - by a total of almost Rs.400 crores. The budgetary allocation for rural development in 2002-03 remains virtually the same as the revised figures for the earlier year.
The decade of liberalisation has of course not been about the poor, who have suffered the not very benign neglect of "trickle-down economics" - the belief that the stimulus of elite and middle-class consumption will over time begin to benefit them through the expansion of the economy as a whole. This year's Budget perhaps has less than ever for these neglected segments. And for the middle-class constituency that was created and nurtured by the decade of reforms, it is a rude awakening. As the political consequences begin to manifest themselves, containment may no longer be an option. Rather, the arduous and long-delayed process of accountability must now perhaps begin.
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