When there are no expectations, there are no disappointments. However, there are a few things to commend. The Budget continues with incremental financial sector reforms, such as allowing more foreign institutional investment in Indian corporate and government debt. The proposals to develop an exchange traded corporate debt market must surely be welcome, with the low retail participation in capital markets.
On taxes, the budget stuck to incremental reforms. The Fringe Benefit Tax was acknowledged to be bad and was diluted. The hike in service tax rate and widening of its ambit were expected and are part of the effort to improve the tax/GDP ratio. It is good to see this ratio enter double-digits; however, it is still low. Full implementation of the reform proposals of the Kelkar panel would augment revenues considerably. Perhaps, that explains partially why collections of both corporate and personal income tax for April-December 2005 were lower by 22% and 15%, respectively.
Yet, the revised revenue and fiscal deficit ratios are lower than the budget estimates, for not-so-sustainable reasons. The reduction in the fiscal deficit ratio is due to Rs 2,356 crore of disinvestment proceeds that the finance minister had not included in his original estimates. Further, half the reduction in revenue expenditure is due to lower interest payments, despite market borrowings and short-term loans being broadly in line with original budget estimates. Interest rates could climb in 2006, globally and in India, and disinvestment receipts are now out of the Consolidated Fund of India.
Prudent fiscal management has eluded this government, as it did its predecessors. Political consensus on quantitative reductions in spending is tough, while qualitative improvement in the impact of fiscal intervention awaits improvement in governance. Without a consensus on avoiding competitive politics on subsidies, sustained improvement in public finances and investment grade credit rating would remain elusive.
Tax demands raised by the government and not disputed by those so assessed are over Rs 45,000 crore. Demands raised but disputed are Rs 65,000 crore. Together, they are about half the tax revenue estimates for 2006-07. Of this, the government has included only Rs 7,000 crore as likely realisation in 2006-07.
In other words, the government expects it would take about 15 years to realise existing arrears. Innovative thinking is needed to accelerate the process. Perhaps, incentives can be given to tax officials, such as a share of the undisputed revenues that are collected, to expedite the realisation of such accrued estimates.
Indeed, this principle should be extended to the entire government, whereby employees (including ministers) are personally rewarded for meeting revenue and other targets. In other words, compensate for the loss of rents that politicians and bureaucrats forego when they undertake citizen-friendly reforms. This is in line with the principle of providing stock options to managers in corporations so that their interests and that of shareholders are aligned.
Similarly, the government should align the interests of the public (shareholders) with that of ministers and bureaucrats (managers). In one stroke, that would improve the quantitative and the qualitative dimensions of India?s fiscal expenditure. Until a consensus evolves on this, we can be happy about budgets that do not damage the country?s intrinsic potential for higher economic growth rates, such as this one.