Shaped by a disaster

Of the making of the Budget in the time of the earthquake.

IN its basic orientation, the Union Budget for 2001-02 has perhaps been shaped by the succession of natural disasters the country has faced in the preceding year. The earthquake in Gujarat of course dwarfs all else in the sheer magnitude of human sufferi ng and material loss caused. Expectedly, policy consultations, though well advanced, were thrown out of gear as the dimensions of the tragedy began to sink in. The government's first response was to impose a 2 per cent additional surcharge on income tax to meet the new expenditure commitments entailed by the earthquake. Increasingly, the temporary expedient of the tax surcharge that Finance Minister Yashwant Sinha had sought recourse to in his last two budgets, looks likely to be integrated into tax rat es as an enduring feature. There seems little possibility of any other outcome, given the precarious state of Union finances.

When budgetary discussions resumed after a fortnight-long dislocation, Prime Minister A.B. Vajpayee reiterated his belief that the Budget should be "growth-oriented", with special emphases on agriculture and poverty eradication. Yashwant Sinha put the ma gnitude of the loss from the quake at just over Rs.20,000 crores. Plainly, the Budget would have to focus on reconstruction to a degree that would be unprecedented. A part of the damage would of course be remedied through insurance claims, voluntary reli ef contributions and international aid receipts. But a vital stimulus would have to come through Central funds, which could then conceivably have the effect of "crowding in" other forms of investment.

The Finance Minister's wish list last year included an annual growth rate of 7 per cent for the following 10 years, as the minimal requirement for the eradication of poverty. This was considered a rather curious assertion, since the economy had been show ing growth rates in excess of this figure for quite a number of the preceding years. But the evidence so far this year is of a perceptible downturn. From a growth rate of 6.4 per cent in 1999-2000, the advance estimates indicate, the economy has slumped to a modest figure of 6 per cent in 2000-01. The Prime Minister's effort to bid up the required growth target to 8 per cent must be seen in this context.

It is likely that the reconstruction process in Gujarat, once it gains momentum over the next few months, could boost growth figures for the economy as a whole. Advance estimates for 2000-01 indicate that construction, trade, transport and communications , and financial services, insurance and real estate, have been three sectors that have shown growth rates well above the national average for the year. Some of these sectors would receive a further impetus on account of the reconstruction effort. But fai ling a large infusion of resources, the languishing sectors, particularly agriculture, which has plunged to two successive years of near stagnancy, will remain immune to the effects of this stimulus.

The sources of the slack growth are not hard to find. Since liberalisation became the ruling mantra, the developmental outlays have been stagnant or declining. From a figure of 18.7 per cent of gross domestic product (GDP) in 1993-94, they have fa llen to 17.8 per cent under the budgetary estimates for 2000-01. The last two years, for which final figures are not yet in, reflect a marginal improvement over the record of the preceding four. But when the final accounts are tabulated, it is likely tha t the figures are likely to be as dismal.

At the same time, the provision for capital formation out of the Budget has fallen precipitately, from 5.8 per cent of GDP in 1993-94 to 3.9 per cent under the budgetary estimates for 2000-01. Despite all the verbal effort that has gone into the task of reducing the government's consumption expenditure - comprising wages and salaries and other costs of maintaining government establishments - the figure has remained obstinately in the range of 4 per cent of GDP.

In turn, the reasons for the budgetary stringency are not hard to find. Tax revenues have failed to respond to the new economic philosophy and have been drifting steadily downwards in relative terms. Even if direct taxes have not performed badly, the mor e important contribution has always come from indirect taxes. And the decline in indirect tax collections - from 5.1 per cent of GDP in 1993-94 to 4.5 per cent in 1998-99, which is the last year for which certified figures are available, speaks of a virt ual fiscal disaster wrought by the new recipe of liberalisation.

Even if the budgetary calculations for 2000-01 and the revised estimates for the earlier year show some optimism that collections will recover to an extent, the actual outcome is unlikely to bear out these expectations. Most observers think this a fairly robust inference, since the years concerned have been marked by a sluggish overall economic performance. Indirect tax collections, in other words, have not recovered from the miscued budgetary calculations of 1997-98, which were initially hailed as visi onary, but finally came to be seen, more accurately, as a reckless leap into the unknown domain of neo-liberalism.

NOW approaching the decadal mark, the economic reforms process in India shows every sign of being sunk in a rut. Revenues have responded adversely, while expenditure commitments have remained inflexible. Yashwant Sinha has in recent times been giving ven t to some of his frustrations over his sheer lack of options. But at the same time, he has also been pledging his unswerving commitment to the philosophy of the reforms. How he intends to reconcile the logical inconsistencies of his position will be know n when he is through with the Budget presentation for 2001-02. But if the past is any guide, he is likely to adopt the path of evasion and stick to the time-honoured nostrum of loudly proclaiming the irreversibility of reforms, while rapidly reversing so me of the taxation measures that have been introduced over the last decade.

The Prime Minister's Economic Advisory Council, which submitted its report recently, has urged the Finance Minister to hold firm to the course that has been charted over the last decade. The formula is for tax rates to be gradually reduced, while the bas e for direct taxation is expanded. Although the strategy has shown some positive results, the rate of increase in direct tax collections has been far too low to offset the crumbling of revenues from indirect taxes.

It is likely then that certain crucial bridging measure to remedy the shortfall in resources will gain greater prominence in the coming Union Budget. The most likely candidate for the Finance Minister's attention would seem to be disinvestment of shares in the public sector. Here again, the record so far has been bleak. Targets have been missed in virtually every year since disinvestment was begun. And even the apparent decisiveness that has been shown in the current year, has been blunted by the realit ies of a stock market sunk in apathy.

Liberalisation has undoubtedly worked for a narrow segment in India. But the consumer boom that was unleashed by lower tax rates and industrial delicensing, has not struck deep roots. The growth momentum is clearly flagging as the fundamentals of chronic under-investment in infrastructure begin to assert themselves. The early belief that changes in the regulatory regime would induce greater private sector participation in the infrastructure sector, today stands decisively refuted. The Enron episode in M aharashtra was the test case for this hypothesis. And recent experience has shown that it is patently unsustainable.

The Finance Minister would have greater cause for alarm if he were to cast his eyes across Indian shores and take in the realities of the global economy. Except for a brief interlude between 1991 and 1992, the U.S. economy has been the principal engine d riving global commerce and industry over the last decade. The consensus today is that the U.S. is headed towards a recession, with concerns being focussed only on the narrow question whether it will achieve a soft-landing that will minimise the attendant disruptions. This could bring bad news for several of the sectors of the Indian economy that have shown some growth impetus over the last decade, notably information technology and software services.

Preliminary results for the first two quarters of the current year demonstrate how the information technology industry has been the sole prop of a corporate sector that is suffering an acute profit squeeze. Aware that desultory conditions in the agricu ltural sector have been responsible for a collapse of purchasing power, leaders of Indian industry have in pre-Budget meetings with the Finance Minister, urged a renewed stimulus for farm incomes. It is clear, though, that the Budget will have to explore options hitherto neglected to find the means for doing what is expected of it.