The annual ritual in which the Finance Minister meets representatives of different sections of society to elicit their views on the direction the annual budget of the Centre should take has begun. So have the pre- and off-budget manoeuvres through which the government seeks to garner "revenues", so as to window dress the budget. The aim of that exercise is two-fold. First, to accelerate revenue generation during the last few months of the financial year, so as to ensure that the deficit on the budget for the current financial year is not far too high relative to the target set in the budget presented the previous February. Second, to ensure additional revenue inflows through off-budget measures in the coming year so that the budget, which receives much attention, can be shown to be les severe.
The need to resort to such measures this year is even greater. Figures relating to the first nine months of fiscal 2001-02 (April-December) indicate that tax revenue collections at, Rs. 126,390 crore are 2.5 per cent below that recorded in the corresponding period of the previous year. That is, instead of rising overtime to meet growing expenditures tax collections are falling in nominal terms, though GDP has been rising, even if less than expected. The fall would have been larger but for the fact that personal income taxes and excise duty collections have grown relative to the previous year, because corporate tax collections have fallen by an estimated 4.2 per cent during the April-December period.
This differential in performance across different kinds of taxes has a story to tell. It is no doubt true that sluggish revenues are in substantial part due to the recessionary trends being experienced in the industrial sector. But if recession alone were responsible, then the trend in excise duty collections should have also been more adverse. The fact that they have risen while corporate tax collections have fallen, points to the fact that the government’s penchant for offering more concessions to the corporate sector, especially in the form of exemptions and deductions, and only partly neutralising it with enhanced excise duty imposts, has also played a role.
In the event, unless the government resorts to alternative measures, the revised revenue and fiscal deficit figures for 2001-02 would be far higher than what was budgeted for. Some of these measures, such as treating the "profits" of the Reserve Bank of India as revenues are now past practice, so that unless these figures are inflated to levels well above what was budgeted for, they cannot resolve the problem. To deal with the special difficulties being faced this financial year, the government has opted for three alternatives, two of which are being implemented and the third being prepared for. First, the government has accelerated the pace of privatisation, which is being pursued in large measure as a revenue generating mechanism, though it has been couched in the rhetoric of reform. Over the last few months the process of strategic sale or divestment of control of public sector units for a small price has been sought to be pushed through, with much success in some cases such as a set of ITDC properties and great disappointment in other cases such as the airlines industry. However, with the programme of accelerated privatisation still on the agenda it is likely that the government would garner a significant sum through this route, even if at the cost of underpricing public assets in distress sales aimed at garnering revenues.
The second initiative being adopted is to transfer to the government’s budget the cash reserves being held by successful and profitable public sector companies, by paying out astronomical dividends. This is being adopted wherever the process of privatisation has been delayed despite the government’s effort. A few thousand crores have been transferred from VSNL alone this financial year. The government’s claim is that such transfers are necessary prior to privatisation, since these reserves are a reflection of revenues foregone for the government as shareholder of the enterprise concerned. But since, many of these companies have a sizable private shareholding because of partial and piecemeal divestment in the past, the beneficiaries of the high payouts would include those private parties who acquired a share in equity in the recent past. There is no reason why these shareholders should be paid out a sizable chunk of reserves, because they were the first off the block, especially when the justification for high dividend pay outs is that those acquiring equity through the imminent privatisation have no rightful claim on these reserves. Moreover, if these companies have accumulated these reserves over time because of their profitability, and if private buyers where willing to buy their equity despite the tendency to retain a substantial part of profits, there is no reason why they should not continue to operate under public management, with provision for higher dividend payments to the government in the future. There is little doubt that if the companies concerned are allowed to use their reserves for modernisation and expansion, they would be able to sustain their favourable track record. It is only the desperation to garner additional revenues that seems to be driving the government along the route of "reserve-farming", which has as its consequence the wilful destruction of even the viable segment of the public sector.
The third measure that is being experimented with is a sharp hike, pre-budget possibly, in excise duties. To this end the government has by ordinance armed itself with the right to impose excise duties in excess of 100 per cent. While justified on the basis of the likelihood of (or need for?) war, given the dispute with Pakistan over the terrorist issue, the real reason for this move appears to be the desperation to government’s own self-imposed but unsuccessful war on the fiscal deficit. Speculation has it (The Hindu, January 10, 2002) that the hike in excise duties would be focussed on petroleum products, with the implicit proviso that the burden of the enhanced duty would not be passed on to the consumers just now, so that the initiative does not meet with opposition. This would result in losses for the petroleum companies and an increase in the oil pool deficit currently placed at Rs. 8000 crore. But the oil companies too would not have to finally pay, since with the dismantling of the administered price mechanism in April, the government would have to issue bonds to the oil companies to finance their deficit.
The absurdity of any such move, if actually undertaken, should be obvious. To start with, since the bonds to be issued in April would have to be counted as part of the government’s borrowing requirement, the measure only amounts to transferring a part of this year’s deficit into next year’s budget. Further, since the higher excise duty would remain in place till reversed, it is likely that sometime later the companies would indeed make the consumers pay the duty and bear the burden of the cascading effects on prices that any increases in the prices of universal intermediates has. This meaningless move at the expense of consumers, if resorted to, would only be explained as an effort to garner immediately the Rs. 1500 to Rs. 2000 crore that the measure is expected to generate.
All this has become necessary because of the peculiar kind of fiscal crisis that neoliberal economic reforms in general and financial liberalisation in particular have generated. Trade liberalisation, which has included steep reductions in customs tariffs, has resulted in a fall in customs revenues accruing to the government. Further, the success of reform being predicated on a rise in private investment, the government has been offering a range of tax concessions as incentives to spur such investment. While these concessions have not been successful, they together with the loss in revenues from customs tariffs, have resulted in a decline in the ratio of central taxes to GDP to the tune of 1.5 to 2 percentage points. This implies that even when the fiscal deficit to GDP ratio is at levels close to where it was in the late 1980s, which has been true in at least a couple of years in the 1990s, the fiscal stimulus associated with that deficit has been far less. A lower tax-GDP ratio implies that the expenditure to GDP ratio associated with any given fiscal deficit would be lower.
If we combine this with the tendency for the fiscal deficit-to-GDP ratio to rule lower because of the kind of fiscal reform being adopted with the government, a basic tendency towards slower growth should be expected. For some time this tendency was being counteracted by special factors such as the post-reform boom in durable consumption attributable to the pent-up demand for such goods from the less liberal era. But once such counteracting factors lose their strength, as has happened in recent years, a recession is inevitable. The recession in turn reduces tax collections further, as has happened in the first nine months of fiscal 2001-02, aggravating the fiscal crisis.
But that is not all. Financial reform has forced the government to substitute less expensive borrowing with credit obtained at much higher interest rates. Not only do real interest rates tend to rule higher under reform to offer better returns to foreign financial investors but the government is forced to abjure borrowing from the central bank at much lower interest rates. Thus even the less efficacious fiscal deficit is partly accounted for by outlays on burgeoning interest payments and consists of a significant deficit on the revenue account of the government. This weakens the fiscal stimulus associated with a given deficit even further.
In the event, neither is the deficit low enough to satisfy the government, the international financial institutions and financial investors, nor does the stimulus provided by any deficit correspond to the apparent size of the deficit. The fiscal crisis in fact worsens, but the deficit it results in does not spur growth even when food stocks are aplenty, unutilised capacity abounds, inflation is low and foreign exchange reserves are comfortable. Pre-budget manoeuvres of the kind described would only contribute to the persistence of this paradoxical situation, while imposing heavier burdens on the poor and middle classes.