Short on substance

The Budget is mired in neoliberal orthodoxy. The commitments represent little more than lip-service to the NCMP.

IT was widely believed, at least by those not wedded to neoliberal theology, that the Finance Minister missed an opportunity last year, when he presented his first full year's Budget, to expand adequately outlays on capital formation and welfare measures, especially in relation to agriculture and rural employment as well as education and health. Instead, while increasing outlays on rural employment, health and education to some extent, the Finance Minister chose to gift the corporate sector a reduction in the corporate income tax rate from 35 per cent to 30 per cent, thus choosing to forego revenue that could have been useful for expanding outlays to meet the goals set by the National Common Minimum Programme (NCMP). He also demonstrated his (theoretical) loyalty to the Fiscal Responsibility and Budget Management Act (FRBMA) by window-dressing the Budget so as to understate the fiscal deficit, using the device of sending many items of expenditure outside the Budget. While enhancing outlays to meet democratic demands articulated at least partially in the NCMP was perfectly legitimate, Professor Prabhat Patnaik had alluded to the potentially dangerous consequences of the Finance Minister's tactics of loading the expenditures on State governments and public sector enterprises in his essay in Frontline on the Union Budget (March 25, 2005).

If not quite like the Bourbons who learnt nothing and forgot nothing, the Finance Minister nonetheless seems extremely reluctant to acknowledge the incompatibility between the neoliberal ideology that underlies the FRBMA and the needs of the NCMP. This year's Economic Survey waxes eloquent on the virtues of fiscal prudence and warns of the follies of ignoring the presumed imperative of reining in fiscal deficits in an attempt to achieve demand-led growth. In his Budget speech, the Finance Minister is even more categorical when he asserts: "Our success this year is due to our unrelenting emphasis on fiscal prudence through enhanced revenues and expenditure control, monetary stability and management of the external debt. However, our success should not tempt us to stray from this path and we shall not do so." One immediate consequence of this obsession with the FRBMA and the holy cow of fiscal deficit is that the Finance Minister has stepped up outlays for crucial programmes rather more modestly than would appear at first sight, a point that has been sharply brought out in Professor Prabhat Patnaik's article in this issue of Frontline.

Let us look specifically at what the Union Budget 2006-07 has to offer by way of revenue and expenditure proposals before turning to certain other aspects of the budgetary exercise. On the revenue side, there are practically no changes with regard to personal and corporate income tax rates, except for a marginal increase in the rate of minimum alternative tax on book profits. There are reductions in both import duties and excise duties, with small cars and aerated soft drinks being the beneficiaries of the Finance Minister's munificence by way of reduction in excise duty from 24 per cent to 16 per cent. If the users of small cars are to be counted as part of the aam admi army, that would surely imply some stretching of the usual norms. The only revenue raising measure of any significance in the Budget is the raising of the service tax rate to 10 per cent and a widening of its base. There is thus no attempt to mobilise resources for development from the well-to-do. Yet the Finance Minister assumes that, while his tax proposals by themselves will garner Rs.6,000 crores in a full year, the overall increase in tax revenues in 2006-07 will be 19.5 per cent over 2005-06, or Rs.72,000 crores in absolute terms. The apparent buoyancy of tax revenues in recent years underlies the Finance Minister's estimates. Nevertheless, it is worth noting that even in 2005-06 when tax revenues to the Centre are estimated to have risen by 21. 4 per cent, the corporation tax collection has fallen short of Budget estimates by Rs.7,000 crores and the excise revenues by Rs.9,500 crores. The overall tax revenue target has been achieved only on account of a surge in import duties, despite lower rates, of Rs.11,000 crores in excess of Budget estimates, and a similar excess of Rs.5,000 crores over Budget estimates by way of service tax collection.

In any event, the fact that the Finance Minister can confidently expect an increase of 19.5 per cent in gross tax revenues in 2006-07 over those for 2005-06, without imposing additional direct taxes, and with only a marginal contribution from budgetary measures, suggests that there was considerable scope for enhancing expenditures with a view to fulfilling NCMP commitments at least to a significant extent. Yet, as has been systematically dissected and demonstrated by Professor Patnaik, the increases in allocations to areas highlighted in the NCMP, such as employment, education, the Integrated Child Development Scheme (ICDS) and health are rather modest, and do not go far towards meeting NCMP goals. The overall plan outlay is higher by a little over 20 per cent, but the proposed capital expenditure in the plan is in fact marginally lower than in 2005-06. The budget numbers also show a decline in food subsidy, which raise concerns about the government's commitment to the public distribution system.

What about sectoral priorities? Here, as has been rightly pointed out by the chairperson of the National Commission on Farmers (NCF), the eminent agricultural scientist Professor M.S. Swaminathan, the Budget does not seem to grasp adequately the depth of the agrarian crisis in the country. While the lowering of the interest rate to 7 per cent on short term loans to farmers up to a limit of Rs.300,000 and the opening of a special loan window for self-help groups or joint liability groups of tenant farmers are indeed welcome measures, they are by no means adequate.

In his Budget speech, the Finance Minister himself has referred to the findings of the 59th round of the National Sample Survey (NSS) that out of the total number of cultivator households, only 27 per cent access institutional credit and 22 per cent receive credit from non-institutional sources, implying clearly that around half of all cultivator households do not receive credit from formal or informal sources.

Yet the only action that he has proposed in this regard is the appointment of a Committee on Financial Inclusion that "... will be asked to identify the reasons for exclusion, and suggest a plan for designing and delivering credit to every household that seeks credit from lending institutions." This is a classic case of passing the buck. The NCF had in fact not only recommended reducing the rate of interest on farm loans to 4 per cent per annum, but also the setting up of a price stabilisation fund to help farmers get a reasonable price for their produce, and the universalisation of crop insurance. But these NCF recommendations have been ignored in the Budget. The Budget also provides little by way of public investment in agriculture.

In a detailed note submitted to the Finance Minister in the run-up to the preparation and presentation of the Union Budget, the Left parties made concrete suggestions for resource mobilisation. These included steps to collect tax arrears of about Rs.115,000 crores, the mobilisation of Rs.25,000 crores by way of dividends from cash-rich public sector undertakings that were not reinvesting their large surpluses, restoration of tax on long-term capital gains in the stockmarket and strengthening and extension of the stockmarket transactions tax to yield about Rs.5,000 crores, a nominal tax on foreign exchange outflows above floor-level with a similar yield, rationalisation of corporate taxation, including removal of various exemptions and export incentives to fetch about Rs.10,000 crores, expanding the base and rate of service tax, increase in wealth tax rate from the current 1 per cent to 3 per cent and imposition of an inheritance tax, starting with a base rate of 1 per cent and an exemption limit of Rs.15 lakhs. Practically all of these suggestions have been ignored by the Finance Minister.

The Economic Survey and the Budget both refer to the findings from the NSS that between 1993-94 and 2003-04 the unemployment rates increased for men and for women, and in both rural and urban areas. The rural unemployment rates by current daily status rose from 5.6 per cent to 9.0 per cent for men and from 5.6 per cent to 9.3 per cent for women, while the urban rates rose from 6.7 per cent to 8.1 per cent for men and from 10.5 per cent to 11.7 per cent for women. Yet the Budget does little to address the issue of unemployment. All that the Survey can recommend in such a bleak situation, in the name of labour market flexibility, is the right of employers to fire workers at will.

In sum, the Union Budget for 2006-07 remains mired in neoliberal orthodoxy, even while political compulsions force it to pay obeisance to the NCMP, and growing inequality contributes to some degree of growth in gross tax revenues in years of reasonable economic growth. The agrarian crisis and the crisis of unemployment remain outside the pale of the budgetary concerns of the policymakers.