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rhetoric of the 2005-06 budget certainly shows a welcome
change from earlier. Previous budget speeches had been
pre-occupied with showing the need for neo-liberal reforms
and how the particular budget being presented was carrying
forward that process. The 2005-06 budget by contrast
talks of the rural sector, employment generation, the
revival of the agricultural sector, infrastructure,
public investment and social sector expenditure. And
it also makes certain provisions in these directions.
These to be sure are far short of what the Left had
asked for in its Memorandum submitted to the Finance
Minister, but there is no gainsaying that the Memorandum
appears to have left an imprint on the budget.
At the same time however this budget does not provide
an occasion for celebration. It does not mark any change
of course away from neo-liberal reforms. On the contrary
many of its suggestions like opening up the mining and
pension sectors to direct foreign investment, encouraging
crop diversification at the expense of foodgrain self-sufficiency,
dismantling the existing foodgrain procurement mechanism
in the name of ''decentralizing'' it, the reductions
in customs duties on a range of capital goods, not to
mention the significant cut in corporate income tax
rate from 35 to 30 percent on domestic capitalists,
are all measures prompted by the neo-liberal outlook
which have serious adverse implications for the economy.
And when one adds to this the pronouncements of the
Economic Survey on capital account convertibility and
on ''labour market reforms'' (which mean in effect the
wholesale institutionalization of the right to retrench),
the recent pronouncements of the Prime Minister virtually
endorsing the ''India Shining'' slogan of Mr.Advani
(''The sceptics of Reforms have been proven wrong''),
and the announcement of 100 percent permission for direct
foreign investment in the construction sector through
the ''automatic route'', it is clear that no change
of course is being contemplated. Indeed let alone a
change of course, we cannot even be sure that the promised
relief to the poor, notwithstanding its comparative
meagreness, would actually be implemented. This is because
the budgetary arithmetic is quite clearly and quite
seriously flawed.
The first thing to note is that the budget's contribution
to the Central Plan, which is supposed to go up in the
aggregate from Rs.82529 cr. in 2004-05 (RE) to Rs.110385
cr. in 2005-06, shows an increase from Rs.8589 cr. to
11,494 cr. under rural development (under which employment
programmes fall). But the actual figure for 2002-03
was Rs.11939 cr. and for 2003-04 Rs.11369 cr. In short,
the budget support for rural development which had gone
down last year is being raised back to the level that
had prevailed in the preceding two years (which straddled
a drought that forced even the NDA to enlarge employment
programmes). The increase therefore is not much to write
home about. True, the increases under social services,
which include education and health, are more substantial,
as is the overall increase, but the view that the budget
constitutes a major step towards expanding rural employment
is untenable.
Let us, for argument's sake however, forget about budget
support as such. Let us just look at the total outlays.
Here we find that the total Central Plan outlay on the
Department of Rural Development is supposed to increase
from Rs.13866 cr. in 04-05 (RE) to Rs.18334 cr., and
within this the total outlay on rural employment from
Rs.6408 cr. to Rs.9000 cr. (The Finance Minister in
his speech mentions a much larger figure but we shall
come to that later). This however is composed of two
elements: an increase of Rs.3582 cr. under the Food-For-Work
programme (FFW) and a decrease of Rs.990 cr. under the
Sampoorna Grameen Rozgar Yojana (SGRY). Since FFW covers
only 150 districts, the conclusion is inescapable that
the government is scaling down employment programmes
in the remaining districts of the country to accommodate
FFW, which is a disturbing retreat from universality
to district-wise targeting!
The Finance Minister of course can cite one extenuating
factor, namely that in the Expenditure Budget the foodgrain
component is not included, unlike in earlier years,
and if the foodgrain component is included then the
FFW expenditure comes to Rs.11000 cr., the figure he
gave in his speech (as opposed to Rs.5400 cr. as given
in the Expenditure Budget). But then it is not clear
why the foodgrain component is excluded from the budget
and what it means in terms of the real provision of
foodgrains. In any case the argument about the implicit
narrowing of the Employment programme through the backdoor
introduction of district-wise targeting remains valid.
What is immediately intriguing about the budget is the
fact that the Finance Minister appears to have given
out substantial tax concessions all around and yet managed
to increase the Gross Budget Support for the Plan by
16.9 percent over the previous year (BE to BE), and
the Budget Support for the Central Plan by 25.6 percent,
even while ensuring a marginal reduction in the fiscal
deficit to 4.3 percent of the GDP. For a government
that till the other day kept asking ''Where is the money?''
when any worthwhile proposal was mooted, including a
universal EGA as promised in the CMP itself, this is
a remarkable turnaround. Suddenly there seems to be
an abundance of resources available for being doled
out. How has the Finance Minister answered the question
which he himself, not to mention the Prime Minister,
has been in the habit of asking of late: ''Where is
the money?'' The simple answer is: through substantial
''window dressing'', both in the matter of the expected
tax revenue and in the matter of the expected fiscal
deficit.
With the reduction in corporate tax rate, with the removal
of a large number of service providers from the purview
of the service tax, with the lightening of the income
tax burden, with the reduction in customs duties on
a large number of items, especially capital goods, and
with significant concessions in the excise duties on
several items, the Finance minister's claim that his
indirect tax proposals would be broadly revenue neutral
and that his direct tax proposals would garner Rs.6000
cr. extra appears entirely untenable, notwithstanding
the 50 paise cess on petrol and diesel (on which more
later) and the slightly heavier taxation on cigarettes,
gutka etc. But let us take his word on this. Even then
the tax revenue calculations appear grossly unrealistic.
Even if we assume a 9 percent growth in real terms of
the non-agricultural sector during 2005-06, and a 6
percent rate of inflation, the nominal growth rate of
this sector comes to 15 percent. At existing tax rates
the total tax revenue cannot be expected to increase
at a rate much higher than this. Since we are taking
the Finance Minister's word that additional tax revenue
mobilization is a small Rs.6000 cr. it follows that
total tax revenue should increase at around 15 percent.
Instead we find an expected tax revenue increase, compared
to 2004-05 (RE), of 21 percent. This is a gross overestimate,
much like what was made in the last year's budget, because
of which last year's tax revenue receipts show a shortfall
of Rs.11000 cr. in the RE compared to the BE. A similar
shortfall is bound to arise in the current year as well.
When we add to this the fact that the Finance Minister's
claim of revenue neutrality of his indirect proposals
and of a small net gain from his direct tax proposals
is quite untenable and that notable tax revenue losses
are likely on both fronts, it is clear that the shortfall
may be even larger.
This would not matter so much if the government's hands
were not tied by the Fiscal Responsibility and Budgetary
Management Act, an utterly silly piece of legislation
supported alike by the Congress and the BJP, according
to which in the event of the fiscal deficit during any
year exceeding a certain threshold the government is
duty-bound to cut back expenditures. While the Finance
Minister has liberated himself from its yoke when it
comes to the overall fiscal deficit figure, as long
as the Act is on the statute books he is bound by this
''during-the-year'' rule. Hence if tax revenues show
greater sluggishness than anticipated in the budget,
the expenditure targets would not be met, in which case
even the budgeted increases on the social sector and
rural development would not be realized.
The second area of 'window-dressing' is with reference
to the fiscal deficit. There is a substantial ''off-loading''
of borrowing from the budget to off-budget entities.
At least three deserve mention. The first is State governments.
The Budget documents show what at first glance appears
a rather surprising reduction in total capital expenditure,
and correspondingly in the Gross Budgetary Support for
the Plan. Plan Expenditure for instance falls from Rs.145590
cr. last year to Rs.143497 cr. this year (BE to BE).
The Finance Minister however claimed that the GBS (on
a comparable definition to what was used earlier) would
be Rs.172500 cr. for 2005-06. The reason for this discrepancy
lies in the fact that following the Twelfth Finance
Commission's report, State governments would be borrowing
around Rs.29000 cr. for their Plans from the market.
Earlier the Centre would have borrowed this amount and
handed it to the States, but now the States themselves
would have to go the market.
This represents of course an offloading of the fiscal
deficit from the Centre to the States. In addition it
is fraught with potentially serious consequences. States
may not be able to get the loans at reasonable terms,
especially in these financially ''liberal'' times (when
even the captive market for government and government-approved
securities provided by the Statutory Liquidity Ratio
is being abandoned according to this year's budget);
some states may not be able to raise their loan requirements
from the market at all. True, the Centre which earlier
had the sole prerogative of market borrowing charged
the States exorbitant rates on the loan proceeds it
made available to them; but the solution to that lies
in regulating the rate at which the Centre can lend
to the States (pegging it for instance at certain fixed
percentage points below the average nominal growth rate
of the GDP) rather than having the States borrow directly
from the market which could even be a prelude to the
fracturing of the nation's unity (if States started
borrowing freely from international agencies).
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