Budget: conformists compromise, but worthy of praise

Updated: Mar 1 2006, 05:30am hrs
The Budget for 2006-07 presented by the finance minister is broadly on predicted lines. The high buoyancy of revenues during the year was predicted. It was also expected that the pressures of competitive populism will claim higher allocations for implementing NCMP, the flagship programmes and Bharat Nirman. Interestingly, the finance minister (FM)has devoted almost 50% of his Budget speech to these programmes, though they constitute only 11% of the outlay!

There is much that is commendable in the Budget. The good news is that both revenue and fiscal deficits for 2005-06 have been reduced from the budgeted level. The achievement is not entirely due to higher GDP figures arising from the revision of the base. The Budget projects the revenue deficit of 2.1% and fiscal deficit of 3.8% for 2006-07. The worrying part here, however, is that capital expenditure as a ratio of GDP during 2006-07 is likely to be a mere 1.9%. Also, do not forget that bonds have been issued to oil firms to cover their losses which are outside the Budget.

Continued high buoyancy of tax revenues of the Centre is also an important achievement. During the last four years, tax revenues have increased at an average rate of 20% and the credit should go to the creation of the Tax Information Network (TIN). In fact, as a ratio of GDP, central tax revenue has shown a steady increase from 8.2% in 2001-02 to 10.5% in 2005-06 and is expected to increase further to 11.2% in 2006-07. Surely, in India, tax administration is tax policy and efforts at improving the information system will continue to enhance revenue productivity and improve horizontal equity. The tax revenue projection has been made in the Budget for 2006-07 assuming a growth rate of 19.5% and it should be possible to achieve this.

The budget estimate projects 50% growth in service tax, 28.4% growth in corporation tax and the FM seems to have given up much hope with Union excise duties. After all, with continued exemptions to the small scale and proliferating area based exemptions, not much can be done there. The tax is expected to grow only at 6.25%. The FM expects that buoyancy in the manufacturing sector will continue to increase demand for imports and customs duty is estimated to grow at 20%.

Tax revenue projection made in the Budget should be achievable
Decision to switch to GST bound to alarm the states
As for excise duties, the FM seems to have not had much hope
The process of furthering tax reform, however, is a mixed bag. Surely, reduction in the peak rate of customs was expected and the manufacturing sector is ready for the change. What, however, is not understandable is the way we calibrate the duty structure. The entire concept of levying lower rate of tariff on intermediate goods and higher rates on final consumer goods creates wide divergence between nominal and effective rates. Nor is it clear that our objective is to give more protection to final consumer goods and less to intermediates and continue to depend on imported inputs.

The finance ministers unilateral statement to switch over to the GST, though it would be welcomed by the industry, is bound to raise alarm bells in the states. In any case, not much has been done towards this end, except to raise the tax rate on services to 125 and add a few more services to the list. The critical issue in tax reform here is to move away from selective taxation to general taxation of services and that is necessary also to prevent special interest group politics and horizontal inequity.-

Surely, people have reasons to question why the service of withdrawing money which they do themselves from ATMs should be taxed whereas, if the service is availed over the counter, it should not be. On the issue of state VAT reform, there is much that has to be done. Hopefully, the promise of reducing central sales tax with a view to eventually phase it out altogether will be considered seriously sooner than later.

Overall, the Budget fares reasonably well in terms of containing the deficits and macroeconomic management. Pressure on interest rates from the Budget will also be much lower. However, the low capital expenditure of 1.9% of GDP is a matter for concern. Surely, there was scope for improvement, but things could have been worse as well. The important issue is, does it really matter

The writer is director, National Institute of Public Finance and Policy(NIPFP)