Musings on the coming Budget

Updated: Feb 26 2005, 05:30am hrs
The finance minister has been continuously bombarded with unsolicited advice on Budget matters for over two months. In addition, he has restored the practice of pre-budget discussions with various concerned groups, including corporates, trade unions, economists and so on,which his predecessor thought he could manage without. The purpose of this piece is not meant to add to the list of suggestions, but to point out the compulsions the FM may be keeping in mind, while giving final touches to his speech.

This Union Budget is going to be the first full one of the UPA govt. The most important influence is likely to be the priorities as laid down in the governments National Common Minimum Programme (NCMP) and as interpreted by the National Advisory Council (NAC). Of course, the wish list will be tempered by the finance ministry, with some help from the Planning Commission, especially in matters relating to slowdown in some vital areas of reforms and new schemes involving extravagant spending responsibilities.

Despite the discordant note often heard from the Left, the climate for a bold reform budget is somewhat favourable. No critical state election is in sight. The economy is, arguably, on an escalator. Almost all the macro economic indicators are showing a favourable trend. This even includes inflation and tax collection. The effect of an unfavourable monsoon on the kharif harvest has not been as devastating as feared. Business expectations are quite good. Some manufacturing industries and consumer sales are showing explosive growth. There is a boom in housing. Credit demand from the private sector has gone up. Banks are no more flush with idle funds. On the whole, there is all-round optimism in the air.

The one thing most likely to find a place in the FMs Budget speech is a fair measure of tax reforms, likely to go well beyond rate adjustments. The replacement of Vijay Kelkar by Partho Shome as fiscal advisor to the FM is unlikely to make much difference in the content of tax reforms. The common strand of the Shome committee report of 2001 and the Kelkar task force of 2004 is long and strong enough.

An uncalled-for debate is on about the tax-GDP ratio whether it is too large, or too small. The minority view, a rather absurd one, is that the Government of India is collecting too much as tax.

A majority of responsible economists do not agree. Another unfortunate development is the possibility of further postponement of the date of introduction of the much talked state Value added tax (Vat). If the government is again going to buckle under the pressure of the trade lobby, one can forget about a rational system of taxation in the country for quite some time. It is known well that the objection of traders to Vat is not so much about the increased workload, or any other inconvenience, but based on the fear that with Vat their real incomes will get automatically revealed and they will be forced to pay much more as income tax.

Another important factor is the award of the Twelfth Finance Commission, accepted fully by the government. On the basis of available information, it appears the TFC has attempted some major re-engineering on fiscal federal relations in favour of the states.

Over the past several years, Union fiscal policies have been adversely impacting on state fiscs. Among these are central pay revision, reduced transfers, increased cost of funds, change in status of small savings and securitisation of state power loans. The net effect has been extreme stress on almost all state finances. There is no doubt that several states, with their populist and, at times, irresponsible fiscal policies did contribute to this mess. One critique of the TFC award is that it may raise moral hazard issues on the part of the states. Let us wait for the report before reaching a judgement. One should not forget there is a clear Delhi-centric worldview which most central politicians, bureaucrats, analysts and even journalists suffer from. Let us concede there are responsible people at state capitals, too.

The run up to the Budget day has become a season of festivity. No other major country is known to have such a hype buildup. This is the Indian circus at its best. The way all the vested interest groups come out with their narrow agendas and making these appear in the national interest is amazing. The time has come to demystify the budget. There is a lot of unwarranted secrecy and non-transparency associated. For weeks, a couple of hundred people are made to stay in the underground dungeons of North Block. It is high time this hilarious drama is dispensed with. Let us not forget that, historically, the Budget exercise was made by the rulers for a colonial dispensation thousands of miles away. Now that we are masters of our own destiny, the baggage of unnecessary secrecy can easily be shed. Besides, being the revenue and expenditure proposals for the next financial year, it is mainly about fiscal policies which have a bearing on nation-building.

Finally, I hope the FM will do everything to remove the drabness and dullness of the Budget speech. I look forward to more of policy statements, rather than micro-discussions of revenues and expenditures.

The writer is director, Council for Social Development, Delhi. The se are his personal views