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I would describe the Budget as a routine, bureaucratic budget. It is by now quite clear that the economy is in the midst of a deep recession, the investment climate is very dull and the infrastructure sector has been performing miserably. Let alone come up with a bold initiative to deal squarely with the problem at hand, the Finance Minister's Budget speech seemed to be supremely oblivious of these gnawing problems.
Over the years the annual ritual of the finance minsters' Budget proposals has come to assume a highly practised art form, and this one was no different. Usually high on rhetoric, generous promises are made and rosy scenarios are sketched about the new schemes that the government may be proposing. But hardly, if ever, is there any reasoned assessment of the plethora of these impressive sounding schemes that have been pursued over the years.
On the face of it, there are some proposals about which one can hardly take an exception to. For example, with regard to excise taxes, it is a welcome moveto reduce the multiplicity of rates to a new regime with only three rates. It can be nobody's case that a large number of finely calibrated rates serve any useful economic purpose. There is now going to be an additional duty of one rupee per litre on high speed diesel oil, the proceeds of which will go towards road building and the social sector. These sectors are crying out for funds. The removal of the anomaly on the long term capital gains tax, which was earlier fixed at 10 per cent for non-residents and 20 per cent for residents, with the later rate now being fixed at 10 per cent, would appear to be a welcome step, for it would be in accord with the principle of horizontal equity. In order to help bring about a balanced regional development, industries locating in the North East region will be granted a 10 year tax holiday. Such measures have earlier been tried out to help bring about a more balanced pattern of regional development, but they have not been dramatic successes. Yet it is perhaps useful toattempt any measure that might help even modestly in raising the level of industrial activity in hitherto neglected areas.
The main problem with this budget is that barring a few administrative tinkerings, like the rationalisation of excise and customs, and a 10 per cent surcharge on income tax on the upper income groups, it lacks a coherent vision for the economy which is stepping into a new millennium. Eight years after the reform process was initiated the tax to GDP ratio is still a full one percentage point below the level achieved in the late `eighties. Even though there has been some expenditure compression in recent years, the tightening has almost exclusively been on capital expenditure, with revenue expenditure going on unabated. This has meant that the revenue deficit continues to be appreciable. Even for the coming year the revenue deficit is being pegged around 2.7 per cent of GDP. Persistently high revenue deficit from the beginning of the `eighties has meant that the size of the debt hasgrown, with its attendant consequences for interest payments.
The other major area of concern has been low recovery on vital infrastructural sectors such as electricity and irrigation. It can be nobody's case that subsidies have no role whatsoever, for clearly a cogent case can be made for accurately targeted subsidies that would enhance the real incomes of the poor. This budget ducks this vital issue.
Both the Economic Survey as well as the finance minister's speech talk of initiating second generation reforms.
This is somewhat ironic, and even presumptuous, for it is clear that we have hardly even scratched the surface of the first generation reforms, and need to go through with it with much more care and rig-our. Ultimately, the budget has to deal with the fundamental problems of poverty, unemployment, illiteracy and ill health for the vast masses of this country's populace, and surely this budget comes nowhere near grappling with these issues.
The author is Professor of Economics at the DelhiSchool of Economics
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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