A budget, besides keeping accounts of income and expenditures, also contains information about the path of action planned by the government. In that sense, perhaps the most salient feature of the Budget 2010 is its laying down of a roadmap not just for this fiscal year but for the medium term spanning at least two years from now. It spelt out clearly what one should expect in the coming years and what one should not.
First, one can expect that reforms in the structure of various kinds of taxes will occupy the government?s agenda. The government?s pronouncement of its plan to implement GST and DTC as of next year is a clear indication that reforms in tax structure will take place on a continual basis. The hallmarks of the new tax regime will be eliminating multiple taxes to form an integrated structure at both the federal and state level, phasing out the CST, making the process of tax payment much simpler, adopting technology both for collection and to ensure compliance and anything else that reduces costs of transaction between taxpayers and the government.
The political economy behind this reform is clear. A government, like any other institution, seeks to minimise costs while trying to earn a certain amount of revenue to cover its expenditures and is subject to various everyday constraints. Here the costs are not just taken from the textbook economics of public finance but also include expenses that can cause political instability, including adverse effects on the probability of re-election. The numerous constraints are shaped by various conflicting elements like varying opinions of coalition partners on different issues, infeasible demands from lobbyists and from pressure groups from industry, agriculture and commerce, etc. In such scenarios, reforms are always staggered and the government follows the path of least resistance. Reform in tax structure isn?t the hardest reform to push.
The old structure of a complicated direct and indirect tax system corresponded to a stagnant economic system where very few individuals and companies paid various kinds of taxes and a vast majority were not under the purview of either because of deliberate non-compliance or a lack of income. However, almost uninterrupted growth in the last decade created new businesses and helped many old ones expand and enabled them to pay taxes. Still, many of them are not under the tax net partly because of the high transaction costs of an unnecessarily complicated system of taxation. Earlier, this did not matter because the size of the taxpaying population was small anyway. However, an ever-increasing number of potential taxpayers, reductions in transaction costs thanks to transparent tax rules, the availability of low-cost technology for surveillance and encouraging participation of states in the CENVAT introduced in 2004 have relaxed both political and economic constraints. These developments have made tax reform a politically superior instrument for revenue collection compared to cutting expenditures by slashing subsidies or undertaking disinvestment of PSUs, which fuels controversy and inflicts political costs.
While tax reform is meant to mop up untapped resources with the least political cost, the use of technology to curb leakages in expenditure will also be a priority and exemplified by the allocation of a whopping sum of Rs 1900 crore to UID, which will help the government in a big way carry out its various poverty alleviation programmes in the future. To give a concrete example, the delivery of food grains at subsidised prices to people under BPL is fraught with corruption as the outlets tend to buy such items at a subsidised price and sell at a higher market price, leaving at best adulterated food items for the poor. However, the introduction of a coupon system in the near future, allowing people to buy food items of their choice at the market price, will certainly eliminate such corruption to a great extent. Though such a system of vouchers is being floated in various proposals, it will be effective when the UID system is in place. The execution of the UID system by 2012 will be a silent revolution in not only curbing the waste of funds but also in radically changing the mechanism for delivery to the poor. Here also, the government, instead of restructuring the internal governance mechanism of institutions responsible for delivery, resorted to technology to deal with corruption and information that would provoke controversy.
Many people are dismayed because the budget did not cut subsidies and shied away from disinvestment, but they do not account for the political constraints faced by a government. Given these constraints, the real question is: did the government do its job efficiently within severe limitations? The answer?a ?qualified yes??was also confirmed by immediate reactions from the financial market.
The author is reader in finance at the University of Essex