Budget 2006 is firmly on the track of fiscal consolidation. The FM promises not to be tempted to ?stray?. The revenue deficit of the Centre is expected to go down by 0.5% to 2.1% of GDP in 2006/07, and the fiscal deficit by 0.3% to 2.1%. The expenditure linked to the social sector initiatives of the UPA government is slated to rise to Rs 50,015 crore ? an increase of 43% over the current fiscal. While plan expenditure is slated to increase by over 20% next year, non-plan, non-interest expenditure is expected to rise by a mere 4% next year. Aggregate tax revenue in 2005/06 is expected to be close to that of the budgeted, although there are significant shortfalls in central excise and corporation taxes. For the 2006/07, gross tax revenues are expected to rise by 19.5%, marginally slower than the growth of 21.4% achieved in the current year.
The strongest feature of the Budget is its unequivocal commitment to fiscal responsibility. The move towards a unified general sales tax on goods and services by 2010 will no doubt be widely welcomed. The reduction in peak customs duty is a bold and welcome move and will strengthen the economy. The reduction in excise duty rates on compact cars will no doubt receive wide support. The increase in the rate of MAT from 7.5% to 10% and the extension of coverage to certain previously excluded incomes is welcome. However, special tax dispensations are unequivocally bad. The increase in the service tax rate to 12% is mild, and generally expected, given the buoyancy in these revenue streams.
The increase in limits for FII investments in government securities and corporate bonds is welcome. Well, if India claims to have first-class equity markets it is because of FII participants who demanded improvement and our regulatory institutions who responded exceedingly well. FII investments in government securities have fallen sharply in the past year as US interest rates have risen.
However, there is certainly appetite for corporate bonds; why we should hesitate to encourage FII participation in this, considering that we welcome ECB borrowings always confounded me. A vibrant corporate bond market is must for a healthy financial system and FII can only help it to develop.
However, there are certain elements in this Budget that cause unease. One, total subsidies have been pegged at Rs 46,214 crore in 2006-07, marginally lower than the revised estimates for the current year. There is likely to be a need for subsidies on PDS kerosene and domestic LPG over and above the Rs 3,000 crore provided for, and it has to be met. The Budget admits that subsidies have become a ?divisive? issue and appeals to Parliament to make progress on ?targeting the poor and the truly needy?.
The other cause of unease is the promise to provide farm loans at 7% interest and budgetary subventions to NABARD to re-finance such loans. Such concessions tend to escalate and in that lies the danger, even one does not make the more purist objection that outright grants are preferable to tinkering with the loan market.
?The writer is economic advisor to Icra.