Budgeting for growth

The longer term must shape this year’s Union budget

Amidst concerns of a larger conflict with Pakistan and the expected pre-occupation in the coming weeks with state assembly elections, Union finance minister Yashwant Sinha begins his annual series of pre-budget consultations with expert groups and sectional interests this week. Last year we had advised Mr Sinha to dispense with this ritual, especially the one of meeting an assortment of sectional lobbies, but Mr Sinha says he finds these interactions useful in shaping budgetary strategy. Thankfully though, he took our advice of not inviting economic journalists and columnists since he can read whatever we have to say in our columns. We shall attend to our dharma through our medium. We have already expressed our views on some budgetary issues in the past few weeks and offer today a preliminary editorial comment on the overall strategy. This will be followed by more specific advice in due course.

The Union budget for 2002-03 will be the last opportunity for this government to get some real reform done. Next year’s budget will be presented in the shadow of an impending general election and will, therefore, have to strike a balance between populism and principle. By the time Mr Sinha presents his budget in end-February, the assembly elections scheduled for this year in some states would have already taken place. Hence, immediate electoral compulsions need not shape Mr Sinha’s budget this year as they will perforce do next year. Moreover, given the tension with Pakistan and the resolve of the Indian people to stand united and fight against any threat to the nation, the present political environment offers an opportune moment for Mr Sinha to take some tough decisions, looking at the long term and the need to accelerate the pace of growth of the economy.

Last year we expressed the view that the single most important factor that must shape Mr Sinha’s budget should be the need to step up the rate of investment in the economy and enable the multiplication of income. Not surprisingly, this year too, this will have to be the single most important guiding principle. The acceleration of economic growth through an increase in the savings and investment rate will have to be the primary objective of macroeconomic and budgetary policy. Year 2001 proved to be a wasted year. While there has been some revival of investment, especially in the infrastructure sector, the progress recorded during the year remains modest. New investment in infrastructure, in the manufacturing sector, in agriculture must drive growth. Such investment must be of the employment-generating kind. Budgetary policy must encourage this.

As for fiscal policy, Mr Sinha has already stated in the interview he gave to this newspaper last month that his focus this year will be on increasing the tax revenues/GDP ratio and doing this through an increase in the share of direct taxes in overall revenues. Mr Sinha has categorically stated that he will not tamper with personal income tax rates and will prefer to step up the tax/GDP ratio by widening the tax net and reducing the incentives for tax evasion and avoidance. Simplification of administrative procedures, elimination of tax exemptions and the like will be his priority and we wholeheartedly endorse this.

While it is true that the scope for revenue mobilisation through indirect taxes is limited, and that direct taxes will have to bear a greater burden of tax mobilisation, there is an unfinished agenda of reform on the indirect tax front as well. In customs duties, the process of reducing rates and, more importantly, rationalising the incidence of customs duties across different kinds of imports — raw materials, intermediate goods, capital and consumer goods — must proceed apace. While domestic industry has represented that the time is not opportune for a reduction in tariffs and while any meaningful action should be taken within the framework provided by the time-table of trade liberalisation negotiated at the World Trade Organisation, India must signal that it is moving in the direction of greater trade openness and bring our tariff rates in line with “Asian” rates, as committed by Mr Sinha in last year’s budget.

While indirect taxes are not expected to generate additional revenues this year, these remain an area for further reform. The structure of taxation remains complicated and further simplification is warranted. In this regard Mr Sinha has a good track record, having carried out significant reform in the past, but more remains to be done. The importance of simplification is underscored by the ticking of the clock on value-added taxation and the time-table of reform on this front at the Union and states level.

While the revenue side will be the more important arena of action, given Mr Sinha’s stated intent to increase the tax/GDP ratio to fiscally empower the government and enable it to generate higher growth, there is an unfinished agenda on the expenditure side as well. This year many ministries have yet to spend the funds allocated to them. This fiscal paralysis of the government is unpardonable in a year of modest growth. This too must receive Mr Sinha’s attention.