The finance minister has exuded confidence at a press meet in Melbourne. He said, ?When I rise to present the Budget on February 28, I intend to be able to say that we have met the (Budget) targets.? Tax revenues have grown 35.1% in April?September this year against a growth of 23.6% in the corresponding period last year. Tax receipts, net to the Centre, amount to Rs 130,000 crore up to September?a figure that is close to 40% of the Budgeted figures.
This is heartening. In previous years, only around 35% of the total annual collections have been received in the first half of the year. The finance minister has reason to be satisfied with the buoyancy in tax revenues, especially with regard to corporate income-tax and service tax. With the industrial sector growing at around 10.9%, and exports at over 37%, there is no doubt that revenue receipts will be as budgeted.
However, there is some anxiety about the expenditure figures. The total revenue expenditure, at Rs 230,000 crores, is considerably higher, even as a percentage of Budget estimates, over last year. On the other hand, Plan expenditure on the capital account, at Rs 11,000 crores, is actually lower than the expenditure last year. Subsidies have increased substantially over the same period last year, and capital expenditure is lagging behind. This means that the increased revenues are going towards meeting revenue expenditure, and the revenue deficit, within the first six months, is at 82% of the budgeted figures?a much higher proportion than last year.
The short picture is that there is unbridled growth of revenue expenditure and of subsidies, and the fiscal and revenue deficit targets can be met only by either not paying pending revenue expenditure bills, or by hoping that capital expenditure will not pick up. Neither of these is a satisfactory state of affairs. Even the proponents of a softening of FRBM targets have argued against increases in expenditure that don?t result in capital formation.
The slow pace of Plan expenditure, an admission that Plan targets in the power, coal and mining sectors will not be met, and the uneven progress of the Sarva Siksha Abhiyan and the rural employment guarantee schemes across states will continue to be cause for concern. After all, the finance minister would be the first to realise that the Budget is only a mechanism for giving direction to the economy, and that it has to be judged by how far progress in the selected direction has been achieved.
Next year, 2007, will mark the third Budget for the UPA, and in several ways, the final opportunity to give a direction and thrust to the growth process. The year after, 2008, would be too close to the elections, and populism will prevail. There appear to be several areas where the finance minister could build upon existing advantages, and correct current imbalances. First, there is a commitment to encourage and grow manufacturing in the country. The current rates of excise duties on manufacturing are adding to total costs, causing distortions through excise-free areas (like Uttaranchal and Himachal) and other exemptions. There is also need to integrate all taxes into a GST (goods and services tax) in the next three years.
The growth of excise revenues is much lower than the manufacturing sector?s output growth. Here is a great opportunity to drastically reduce excise duties across the board, from 16% to 8%. This would reduce overall costs, improve compliance, encourage growth in manufacturing, and the finance minister would probably find that revenues continue to be buoyant. Second, there is an opportunity to reduce customs duties, as well. Last year, the reduction in peak rates from 15% to 12.5% was negated by the imposition of special additional duty ? this year, given the growth in imports, there is an opportunity to bring peak rates down to 10%. Third, on income-tax, there is considerable scope for reduction of exemptions and for rationalising tax rates?effective tax paid by industry is still only around 15-17% of retained earnings.
Two other major initiatives are possible. The first, and most important, is to ensure that there is some action on the agriculture front. Three years have seen too many promises, but little action. There is disempowerment of the rural populace, a distancing from the benefits of development that is increasingly visible and quite frightening. It would be a pity if a government that promised to focus on inclusive growth ends its tenure with growing rural-urban and intra-regional disparities in income. Second, infrastructure is just not moving fast enough and improvements are very slow.
Signals on reforms in the financial sector also need to be clarified. A decision that there would be a limit of 5% for a single foreign owner in the stock exchanges is curious, for the exchanges are nothing but a technology platform?they do not make markets. If we are secure with 74% in telecommunications and 100% in power, how is it that we are less secure on a technology platform? The different voices emerging from the RBI, Sebi and the finance ministry on several issues need to be harmonised, so that the international investor is clear about the predictability of the environment.
Is insurance going to happen, or not? Pensions? There has been little movement in the next stage of reforms in the financial sector, even in those areas where there is no legislative action necessary. This is an opportunity for the finance minister to look beyond numbers, and attempt to make changes of a more permanent nature.
?The writer is a former finance secretary and economic advisor to the Prime Minister
