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The budgetary non-exercise

Print edition : Mar 24, 2006 T+T-

This year's Union Budget is more a set of projections than a mechanism for conscious intervention with a clear purpose.

THE most remarkable aspect of the 2006-07 Budget is that the gross tax revenue of the government is supposed to increase by Rs.72,012 crores, or by 19.5 per cent, even without any significant additional resource mobilisation (additional mobilisation is a paltry Rs.6,000 crores). Since any increase in gross tax revenue can ceteris paribus entail an equi-proportionate increase in all major budget heads, the assumed buoyancy of tax revenue should have enabled the Finance Minister to provide, almost effortlessly, for hefty increases in a whole range of expenditures. Given that net interest payments are supposed to increase by only 10 per cent and defence expenditure by only 7 per cent, the increase in budgetary provisions for capital formation and welfare expenditures could have been even sharper than the rise in tax revenue. But what is surprising about this Budget is that, contrary to the general impression, the Finance Minister has raised expenditure on capital formation and on providing relief to the people by only meagre amounts.

Plan capital expenditure, which is the core of capital formation, is supposed to decline from Rs.29,638 crores in 2005-06 (Revised Estimate) to Rs.28,966 crores (Budget Estimate): the decline in the Central Plan is from Rs.24,417 crores to Rs.23,815 crores, and in Central assistance to State and Union Territory Plans from Rs.5,221 crores to Rs.5,151 crores. To be sure, the total Plan expenditure is supposed to increase by 20 per cent, but the entire increase is in plan revenue expenditure, where the increase is of the order of 26 per cent. While the proposed increase in the budgetary contribution to the Central Plan of 22.4 per cent may appear impressive at first sight, and the proposed increase in the Central Plan outlay by 24 per cent even more so, the point to note is that these increases relate entirely to Plan revenue expenditure, and not to capital formation per se. Indeed the share of capital outlay in Plan expenditure, which was 33.8 per cent in 2004-05 would be declining to 16.8 per cent, a decline which, according to one of the Budget documents itself, is "a matter of concern".

When we come to welfare expenditure, the situation is equally bleak. The increase in Central Plan outlay on rural employment (excluding the northeastern areas) is a mere 10 per cent, from Rs.11,700 crores in 2005-06 (RE) to Rs.12, 870 crores in 2006-07 (BE). While the National Rural Employment Guarantee (NREG) scheme has been launched with Rs.10,170 crores of Central Plan outlay, at the same time the Sampoorna Grameen Rozgar Yojana outlay has been slashed by Rs.4,950 crores and the Food-for-Work programme that claimed Rs.4,050 crores last year has been totally wound up (to be replaced by the NREG). Thus even while the NREG has been given Rs.10,170 crores, expenditure amounting to Rs.9,000 crores has been simultaneously slashed. The Finance Minister himself referred to the NREG as the "primary instrument to combat rural unemployment and ... poverty". Yet he could not find any resources for it other than what was being spent on employment schemes anyway.

This fact has an important bearing on the outlay for the so-called "flagship programmes". The Finance Minister announced that "the bulk of the resources must go to the UPA [United Progressive Alliance] government's eight flagship programmes", and claimed that he was increasing the allocation for these from Rs.34,927 crores last year to Rs.50,015 crores, or by 43.2 per cent. But since the NREG, which is one of these eight flagship programmes, merely replaces existing employment programmes, if, instead of taking the outlay on the NREG alone in our calculation of the "flagship" programme outlay, we include all employment programmes under the "flagship" label, then the increase comes to only Rs.10,138 crores, or 23.8 per cent, rather than the Rs.15,088 crores, or 43.2 per cent, as claimed. In other words the real order of increase is no higher than that of Central Plan outlay as a whole and not much above the rate of increase in gross tax revenue. The Minister's claim about a particularly massive increase in welfare expenditure, therefore, is unfounded.

Indeed, on the contrary, the increase in outlay on the Integrated Child Development Scheme is woefully inadequate to meet the Supreme Court's directive to universalise the scheme. And given the commitment of the National Common Minimum Programme (NCMP) to devote 6 per cent of gross domestic product (GDP) to education, the proposed increases in outlay for this sector are so small that one can safely predict the perpetual non-fulfilment of that commitment.

The fact that food subsidy has been fixed at Rs.24,200 crores, as against Rs.26,200 crores in last year's Budget and Rs.23,200 crores according to last year's RE, suggests that the government is contemplating not an expansion in the coverage in the Public Distribution System (PDS), but perhaps a contraction. The food subsidy, which covers the losses of the Food Corporation of India (FCI), was kept low last year owing to the significant depletion of foodgrain stocks (and hence reduction in the FCI's expenditure in carrying stocks), caused by the government's frantic efforts towards this end, including even the dumping of stocks on the international market at prices below those charged to the below poverty line population. Since the stocks should be larger this year, the non-increase in food subsidy may be an ominous portent of reduced PDS coverage (including a slackening in procurement). Besides, even if coverage is not reduced, in the context of the NREG whose objective is to inject additional purchasing power into rural India, an increase in coverage was called for, which has not happened, a fact that only strengthens the belief that the government is not seriously considering any increase in the outlay on employment generation.

Even the initiatives taken in the field of agriculture fall far short of requirements. True, agriculture is a State subject and the Centre's role is rather limited in this sphere. But it could have taken steps towards setting up the Price Stabilisation Fund and universalising the crop insurance scheme, as suggested by the M.S. Swaminathan Commission. Even the reduction in the short-term interest rate for farmers to 7 per cent falls short of its recommendation of 4 per cent. Besides, the progressive withdrawal of banks from the countryside of late has meant the coming up of a host of intermediaries, reminiscent of the old moneylenders, between them and the peasants. Unless banks are enjoined to expand or restart rural branches, merely getting them to give more credit to "agriculture" would strengthen the new moneylender class.

Leaving aside the question of the type of expenditure, if we just take the total expenditure, the increase in it comes to 10.9 per cent, from Rs.508,705 crores to Rs.563,991 crores. This order of increase is too meagre to reverse the trend of expenditure-deflation that the economy has witnessed in the past, which has reduced mass purchasing power and made it demand-constrained. In short, quite apart from not providing for larger capital formation and showing timidity in the matter of welfare expenditure, the Budget has not even signalled a breakthrough in overcoming expenditure-deflation and demand constraint. The reason for this is simple: the Budget lacks any clear focus. It is more a set of projections than a mechanism for conscious intervention with a clear purpose. Given the fact that revenue at existing tax rates was expected to show such a pronounced rise, the Finance Minister could have gone in for a modicum of additional resource mobilisation to effect increases in capital formation the need for which he has often emphasised, or to give a big push to employment generation and welfare expenditure which the NCMP had promised to do. He has not done so. The securities transactions tax, introduced earlier but hastily scaled down to insignificance in the face of opposition from stockbrokers, is raised by 25 per cent; but an insignificant rate raised by 25 per cent still remains an insignificant rate.

The reduction in prices of small cars by as much as Rs.20,000 a car lacks economic justification, notwithstanding the Finance Minister's technical argument concerning CENVAT (central value added tax). And the increase in cess on domestically produced petroleum crude, which would fall on public sector companies, represents not only a soft option, but one which constitutes a prelude to a price increase for consumers, notwithstanding the Minister's assurances.

The shocking omission is the refusal to expand the scope of the capital gains tax. Capital gains represent a form of unearned income. There is absolutely no moral justification in letting capital gains go virtually tax-free when earned income invites significant taxation, and that too at a time when, thanks to the stockmarket boom, enormous amounts of capital gains are being made absolutely effortlessly. According to an estimate made by Professor C.P. Chandrasekhar (Economic and Political Weekly), if we look at the volume and value of the daily purchases of shares of 28 large companies over a one-year period, and assume that each such traded share is held exactly for 365 days, then the magnitude of capital gains on these shares would come to Rs.78,000 crores. Even a nominal tax of 10 per cent on these gains would fetch the government Rs.7,800 crores annually. The virtual abolition of the capital gains tax, which amounts to encouraging speculation at the expense of enterprise, is indefensible; no budget worth the name can afford to ignore this question.

But the Finance Minister is more concerned with keeping the stockmarket boom going, using whatever instruments he can, than with meeting the NCMP commitments. The refusal to impose a meaningful capital gains tax is a part of this effort; the measures of financial liberalisation announced in the Budget, though detrimental to the economy, serve the same purpose. Allowing banks to sell government securities and lifting the ceiling on FII (foreign institutional investor) purchases of such securities, constitute a dangerous trend. First, it hands over a plum asset, namely sovereign public debt, to international finance capital; and secondly, it makes the state of public finances in the future, for instance how much and at what rate the government can borrow, dependent on the whims and caprices of a bunch of international speculators, which amounts to linking the fate of millions, even more directly than before, to these whims. Even the decision to allow Indian mutual funds to invest abroad is indefensible in view of the government's own persistent emphasis that investment within the economy is in need of greater savings.

Finally, the pertinent question remains: what explains the recent upsurge in tax revenue, when the tax-GDP ratio, in keeping with the experience of other countries pursuing neoliberal policies, had fallen over the 1990s? The rise in this ratio began in 2002-03 when tax revenue increased by 15.6 per cent over the previous year's collection; the growth rates of revenue during the subsequent years were 17.6, 19.9 and 21.4 per cent respectively. And the estimate for 2006-07 is 19.5 per cent. The gross tax revenue of the Centre, which was 9.2 per cent of GDP in 2003-04, increased to 9.8 and 10.5 in the subsequent years and is expected to reach 11.2 per cent in 2006-07.

This fiscal turnaround owes little to the collection of arrears: in fact in 2006-07, of the expected revenue increase of Rs.72,012 crores, collection of arrears accounts for just around Rs.10,000 crores. The real reason lies in the enormous increase in economic inequalities under the neoliberal regime, or, putting it differently, in the rise in the share of economic surplus in GDP. Since the tax paid per unit of surplus, taking all taxes together, tends to be higher at the margin than the tax paid per unit of non-surplus income, the phenomenal rise in the share of surplus necessarily entails, eventually, a rise in the tax-GDP ratio even at the existing tax rates (which does not prevent the share of post-tax surplus from rising). The increase in tax revenue is not because of any initiatives of the government but because of processes outside of the fiscal sphere. Governments have had higher tax revenues falling into their laps without much effort, and have increasingly made budget-making into the non-exercise that P. Chidambaram's Budget has been.