A lack of perspective

Budget 2002 misses an opportunity to spur growth in a slowing economy, and imposes new burdens on those sections most affected by the global and domestic slowdown.

FINANCE Ministry mandarins have been unusually candid in the aftermath of Budget 2002. To start with, Finance Minister Yashwant Sinha declared in a television interview that it is too much to expect every Budget to have behind it a "grand plan". This Budget is one, he suggested, which merely seeks to consolidate processes initiated in previous years. That declaration, many people would argue, was just a euphemistic defence of the fact that the Budget lacks perspective.

Soon after this implicit declaration of a lack of direction, Revenue Secretary S. Narayan held industry responsible for certain features of the Budget. Speaking to representatives of the Confederation of Indian Industry during a post-Budget interaction, he argued that unlike last year's Budget, which provided Rs.16,000 crores in the form of "giveaways", this year's offers none, because of lack of resources owing to the poor performance of industry. Industry's failure to deliver, according to him, had in fact forced the government to impose additional taxes on the middle classes. "The corporate world must understand that this year the middle class is bearing your burden," he is reported to have said.

These two admissions - of a lack of perspective and of the necessity for new imposts on the middle class (and the poor, it should be added because of the failure of earlier tax concessions to spur industrial growth and sustain revenues - sum up the essential nature of the Budget. The new imposts come in various forms: a surcharge on income tax, reduced tax concessions for savings, higher LPG and kerosene prices, hiked sugar prices, enhanced postal and rail tariffs and increased excise duties on items of mass consumption. Through these means the Finance Minister has mobilised a significant amount of resources over a full year.

Notwithstanding these imposts the Budget disappoints because it does little to reverse the recessionary trend in the economy, despite the opportunity offered by the accumulation of huge food stocks in the godowns of the Food Corporation of India (FCI), the extremely comfortable level of foreign exchange reserves and the low rate of inflation in the economy. This combination of circumstances provides an opportunity to boost demand and growth through enhanced government investment, which would result in output increases rather than inflation, since there are hardly any supply bottlenecks in the system and those that remain can be eased by expending a part of the foreign exchange reserves on imports from abroad.

But the opportunity missed is not just that for resorting to counter-cyclical expenditure policies. Inasmuch as massive food stocks constitute an important aspect of the current conjuncture, this counter-cyclical thrust could have taken the form of a massive food-for-work programme aimed at building rural infrastructure. This would have increased rural employment and helped reduce poverty. It would have also reversed the observed decline in the ratio of rural capital formation to gross domestic product (GDP), which even the Economic Survey admits is a major factor behind the poor growth performance of Indian agriculture during the 1990s.

Yet, despite protestations to the contrary, efforts on the food-for-work front have been meagre. The expenditure on rural employment was raised by Rs.1,300 crores in 2001-02, by introducing a food component of just Rs.800 crores. And the budget figures for 2002-03 expect to raise these expenditures by a marginal Rs.371 crores, by raising the food component in budgeted expenditures by Rs.421 crores. That this is a minimal use of the food stocks should be clear from the fact that stocks with the government are valued in excess of Rs.50,000 crores.

The point is that the cost of carrying these stocks has increased the subsidy bill of the government substantially, from Rs.12,125 crores in 2000-01 to Rs.17,612 crores in 2001-02 and a budgeted Rs.21,200 crores in 2002-03. The government could have saved much on these by diverting stocks to a food-for-work programme, which would have helped build rural infrastructure and spur growth.

But paralysed by its internalisation of the obsession with the size of the fiscal deficit, the Bharatiya Janata Party-led government has not merely chosen to forsake this opportunity, but also to use the large food stocks to launch an attack on the farming community. There are two ways in which the government has decided to rid itself of the food stocks that provide the above opportunity: first, it is choosing to dispose as much of these stocks. The Finance Minister has listed a number of mechanisms through which he plans to reduce the level of stock-holding. These include increased allocations for below poverty line (BPL) families; launching of a major food-for-work programme; allocation of 30 lakh tonnes of foodgrains free of cost to the States for relief works in areas affected by natural calamities; open market sales of 30 lakh tonnes; and enhanced incentives for export of foodgrains.

Of these, the budgeted allocation of food for employment programmes in 2002-03 totals Rs.1,221 crores as compared with Rs. 800 crores in 2001-02, indicating the rather limited increase on this ground. The real effort at disposal is likely to occur through provision to the trade at extremely low prices for sale either in the domestic or export market.

The second, medium and long-term strategy to reduce the embarrassing level of food stocks is to curtail the level of procurement. The Finance Minister has declared that "the current situation of open-ended procurement by FCI at a high price and disposable at a heavily subsidised price is not sustainable." This is nothing but a misleading justification of a decision to dismantle the system of procurement and distribution. The reason why stocks with the government are as high as they are is its decision in recent times to increase repeatedly the issue price of foodgrains, which resulted in a fall in offtake. This not only increased stocks with the government but also resulted in a large outlay on "subsidies" aimed at covering the carrying costs of the FCI.

In response to that problem, the government is seeking to limit its procurement so as to reduce the accretion to its stocks. This would leave farmers to their own resources and expose the farming community to fluctuations in market prices at a time when international prices of agricultural commodities are falling.

The impact of the latter is intensified by the removal of quantitative restrictions (QRs) on imports and the Centre's hesitation to raise tariffs on agricultural imports substantially, though the evidence of protectionary measures for agriculture in the G-7 countries is overwhelming. Further, at a time when competition from exports from abroad is intensifying, the ability of domestic producers to face up to international competition is being undermined by the decision to cut fertilizer subsidies which would raise fertilizer prices by at least 5 per cent.

If there is no thrust towards stalling and reversing the recession, why has the government sought to impose new taxes that are expected to garner more than Rs.10,000 crores? The answer lies in the erosion of the revenue-generating capacity of the system effect that the regime of taxation put in place during recent years has ensured. This is reflected in the huge shortfall in revenues in 2001-02 relative to what was budgeted for. The shortfall in gross tax revenue in 2001-02 amounted to a whopping Rs.30,000 crores or 13 per cent of the budgeted figure. The shortfall occurred in the case of all major items of taxation - corporation and income taxes and customs and excise duties. However, there were significant differences in the extent of the shortfall: it amounted to 9 per cent in the case of excise, 12 per cent in the case of income tax, 15 per cent in the case of corporation tax and a huge 21 per cent in the case of customs tariffs. As a result of the last of these, customs duties collected in 2001-02 were 9 per cent less than actual collections in 2001-02.

The shortfall in revenues has meant that the post-liberalisation trend of a decline and subsequent stagnation of the tax-GDP ratio has persisted. Combined with the government's obsession to keep the deficit under control irrespective of the supply situation in the economy, and despite the government's accelerated effort to garner resources from disinvestments, this has substantially reduced its ability to stimulate the economy. The consequent recessionary trend contributes to a worsening of the fiscal position of the government.

Interestingly, however, the shortfall in tax collection has not affected the government's expenditure as adversely as is to be expected. While there was a shortfall in revenue expenditures relative to budget estimates to the tune of Rs.10,000 crores, an increase in Plan expenditure relative to the budgeted amount has resulted in an overall shortfall in expenditure of just about Rs.5,000 crores. The question then is how the government has been able to sustain its expenditures despite the huge tax collection shortfall.

There are two developments of relevance here, besides the fact that a third of the tax revenue shortfall is a burden on the States rather than the Centre, making the latter's revenue loss on this count about Rs.20,000 crores. First, despite the recession, the government has been able not just to meet but in fact exceed its non-tax revenue by Rs.1,500 crores relative to what was budgeted. This is predominantly owing to windfall gains in two areas. An excess accretion of Rs.3,000 crores in the case of Dividends and Profits, owing to a sharp jump in dividends from public sector enterprises from the budgeted Rs.5,419.50 crores to Rs.10,295.78 crores. This is largely explained by the one-time "revenue farming" resorted to by the government, by transferring to itself cash surpluses with enterprises such as Videsh Sanchar Nigam Limited (VSNL) prior to their disinvestment. The other was the gain in non-tax revenues in Communications, which stood at Rs.7,395.21 crores against a budgeted figure of Rs.3,725.29 crores.

The second, and more obvious, way in which the government has been able to keep expenditures going is by increasing its budgeted fiscal deficit of Rs.116,314 crores to an estimated Rs.131,721 crores and its budgeted open market borrowing of Rs.77,353 crores to an actual Rs.91,480 crores, which helped neutralise the much lower than budgeted receipts from disinvestments as well.

It should be obvious that the government cannot expect the first of these windfall gains to accrue every year. Yet, the budgeted figures for 2002-03 provides for a large contribution from non-tax revenues, that rose in 2001-02 to 33 per cent of all revenues as compared with 28.9 per cent in 2000-01. Revenues from Dividends and Profits are expected to remain at Rs.18,805 crores as compared with Rs.18,292 crores and revenues from the Communications sector at Rs.5,256 crores as compared with Rs.7,395 crores. But with the government having chosen to budget for a fiscal deficit of just Rs.135,524 crores in 2002-03 as compared with Rs.131,721 crores in 2001-02, even this is inadequate to finance the increase of close to Rs.46,000 crores in expenditure that it expects to incur in the coming financial year.

It is for this reason that the government has decided to resort to a range of imposts which, put together, seems to have no driving perspective other than increasing revenues through any means possible. In the event, the government has budgeted for an increase of Rs.39,107 crores in tax revenues. Since revenues from Customs duties are expected to rise by just Rs.2,000 crores from their depressed levels of 2001-02, the burden must be imposed through other means. The structure of that burden is disconcerting indeed. While corporation taxes are expected to contribute an additional Rs.9,500 crores, taxes on income are budgeted to garner an additional Rs.8,000 crores and excise duties a huge Rs.17,000 crores.

Since the corporate tax rate on foreign companies has been reduced from 48 to 40 per cent, all of the increase here is owing to the hike in surcharge and the expected buoyancy. The gains in income taxation are expected to come from a combination of buoyancy, changes in the dividend tax, the effects of the surcharge and a reduction in tax exemptions for savings by middle class households. And the increase in excise duties, which would now apply at higher rates on goods that were taxed at a lower 4 per cent, would be a burden on all consumers, rich and poor alike. This change in the structure of taxation is clearly regressive. The Revenue Secretary is wrong to say that the burden would be borne by the middle class. It would fall heavily on the poor as well. Thus it is not just that the Budget misses a major opportunity to spur growth in a slowing economy, but it imposes or seeks to impose new burdens on those most affected by the global and domestic slowdown.

One area where this can have extremely debilitating consequences is in the evolving fiscal relationship between the Centre and the States. The Budget threatens to accelerate the slowdown in the economy by increasing the fiscal squeeze applied on the States. Out of the shortfall of Rs.30,000 crores in tax revenues as a result of the Centre's fiscal reform, close to Rs.10,000 crores would have accrued to State governments as their share of devolved taxes. This loss would only intensify the fiscal crunch that the States have been facing. In addition, the government has decided to use these financial difficulties of the States to force them to adopt World Bank and International Monetary Fund (IMF) type reform. Thus, as much as Rs.12,300 crores is being provided as "reform-linked assistance" to States and another Rs.2,500 crores for policy reforms in sectors which are constraining growth and development. This totals close to Rs.15,000 crores or as much as a third of the budgeted Central Plan assistance to the State governments of Rs.46,629 crores for 2002-03. Thus a major chunk of statutory central transfers are now being linked to the willingness of the States to implement neo-liberal reform.

After putting the States in a fiscal bind through its own policies, the BJP government is now using what are constitutionally warranted transfers to impose on the State governments its own failed economic ideology. This effort to impose deflationary and contractionary policies that are generating a crisis at the Central level on State governments as well is a sure means of widening and intensifying the crisis facing the economy today.