It is a cynical observation on our politics that manifestoes mean little. They tend to promise all things to all people, which without divine attributes nobody can possibly deliver. But this time round there is a Common Minimum Programme (CMP) which has red lined ?no-go? areas and action points. Things like employment generation, rural and urban development, creation of physical infrastructure, radical improvement in the state of school education and public health and some relief to the farming community are without doubt serious concerns that can be expected to inform the course of policy formation of this government. So the first Budget of the new government that is due in early July is going to have to make financial provisions towards realising these mission objectives.

Before we get into the fiscal implications of this, it is pertinent to point out the bigger picture on these subjects that transcend mere fiscal arithmetic. The quality (and quantity) of social service provisioning is more than being just about money. Weakness in the education provided by government schooling system is primarily due to institutional failures. It is axiomatic that for a system that provides public goods like education to function properly, there has to be ?ownership? by the community being serviced. The institution of modern schooling in this country emerged out of the efforts of local communities and their leaders to bring education to their children. The level of community involvement was high ? which is why the state schooling system in most parts came up first as municipal schools. Mindless centralisation turned them into government schools; first administered and then financed by the state secretariat in remote capitals. Without reforming the dysfunctional structure, just throwing money at it is likely to achieve little that is worthwhile. In a less fundamental manner, for other social development initiatives to bear fruit ? and not have the money simply lining the pockets of intermediaries ? issues of governance need to be dealt with. At the very least, some incentives and disincentives must be hard-coded in-to the system, so that significantly more than Rajiv Gandhi?s famous 15 paise on the rupee do indeed reach the intended beneficiary.

Returning to mundane matters of financial arithmetic arising presumably out of adamant insistence by the Left parties. The CMP thus wants to raise government spending from current levels of 3 per cent of GDP to 6 per cent; that on public health from 1 per cent to 2 to 3 per cent. And unstated additional amounts on creating physical infrastructure and on employment generation. We know the parlous condition of the finances of state governments. So the resources will have to come either directly from the Union budget, and/or through increase in shared taxes collected by the Centre. Were we to add up all these additional calls on expenditure the bill comes to between 5 and 6 per cent of GDP, that is, Rs 120,000 to 180,000 crore. The total current revenues ? tax and non-tax ? of the Centre before devolution as per the Interim Budget for 2004-05 is about Rs 370,000 crore. Clearly an increase of 33 to 50 per cent in the level of revenues is out of the question. Now let us take the point of ?cess on all central taxes to finance the commitment to universalise access to quality basic education?. The CMP also says that at least half of education expenditure is to be spent on primary and secondary schooling. Half of the 3 percentage point of GDP increase sought for education amounts to Rs 45,000 crore. To finance that from cess would mean an average cess of 15 per cent on all central taxes. Even if there is a phasing in, the above numbers do not tell us a happy story. Either, these numbers were dreamt up by Left personages singularly incurious of both reality and of governance, or inserted with the conscious awareness of their impossibility.

Now let us briefly return to the real world. The ratio of Central taxes to GDP declined from an average of 10.5 per cent of GDP in the closing years of the 1990s to about 9 per cent in recent times. This was entirely due to a sharp fall in indirect taxes. Custom duty collections fell from 3.8 per cent of GDP to 1.8 per cent and union excise duty collections fell by 1.2 percentage points over this period. The big increase in income and corporation taxes from 2 to 3.3 percentage points of GDP helped neutralise most of the losses on indirect taxes, but not completely. Remember that in the late-1980s the rupee was overvalued (the black market rate was at least 25 per cent higher than the official exchange rate). Which meant that there was a premium for access to foreign exchange at the official rates. The ridiculously high rates of import duties was possible, precisely because of this premium. Post-1991 both import duties and the exchange rate were rationalised. Then again excise duties prior to 1991 tended to cascade because there was no set-off for duties paid on inputs. So it is no surprise that tax reforms should have produced the results that it did. However, from a revenue perspective it is still a loss and it has been argued that compensatory adjustments need to be made.

Where should we look to adjust for the revenue loss of 1.5 percentage points of GDP? The rational answer is trade taxes. The rates of import duties need to be brought down further, so the candidates are the sales tax or the union excise duty. The Centre can do little about the former, but everything about the latter. In order to bring about an adjustment for the nominal 1.5 percentage points of GDP revenue loss, union excise duties will have to be raised by about 40 per cent. That is, the base rate of Cenvat needs to go up from 16 to 22 per cent, with proportionate adjustments on the other rates. If taxes are raised this sharply, it is difficult to visualise the great manufacturing boom that everybody, for absolutely all the right reasons, want to happen.

How about soaking the rich? Sure, if what we want is the vibrant economy of Britain in the better part of seventies and eighties or the even more spectacularly performing one in the former Soviet Union. Even communist ruled China knew far better than to play parlour games with economic management. So what is possible? We shall visit that next week.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)