UNDERSTANDING THE BUDGET 2003-04
Raghunath
Rau *
The Finance Minister,
Shri Jaswant Singh, certainly went to a lot of trouble over the
presentation of his first budget since he switched places with
Shri Yashwant Sinha in the last Cabinet reshuffle. Instead of
simply reading out what officials had prepared, Shri Singh meticulously
drafted most of the budget speech himself and made quite a few
innovations in its format.
In the event, the
Finance Minister put together a cautious and yet growth-oriented
budget. He tried to keep up a feel-good atmosphere even as he
sought to kick-start a sluggish economy with incentives for spending
and investment. Given the fact that he had to give due allowance
to political compulsions because of impending elections to State
Assemblies as also the General Elections later, Shri Singh can
be said to have done a fairly systematic and decent job of it.
But unfortunately
for the Finance Minister factors beyond his control pushed the
budget off the front pages of newspapers within two days of its
presentation. The results of the Himachal Pradesh Assembly elections
came as such a shock to the BJP-led ruling combine that it found
it difficult to project the budget as a weapon for future electoral
battles. Even a small cut in subsidy for fertilizers was seen
as being anti-farmer, and Shri Singh will have his work cut out
to prevent the sort of rollbacks which gave his predecessor a
bad name.
But that is for the
future. It is quite possible that the party may get over the Himachal
shock in the next few months and allow the budget to stand on
its merits alone, which are certainly considerable. At least the
Finance Minister must be hoping that the good points will emerge
with even greater clarity once Parliament takes up detailed consideration
of the proposals at the committee level.
The Minister deviated
from English to break into Hindi only once during his two-hour
speech. That was when he stated the twin objectives of the budget:
"Gareeb ke pet mein dana, grihini ki kutia mein aanna"
(food for the poor, money for the housewife). Of the two, Shri
Singh surely fulfilled the second, what with his incentives package.
The ordinary salaried
person, a large part of the middle class, will pay less in taxes
and will be able to buy products like cars and air conditioners
at lower prices. And sure enough, within a day of the budget presentation
leading automobile manufacturers announced steep cuts in the prices
of most of their models. That was the first tangible effect of
Shri Singh’s proposals. His message is that it is the consumer
who really fuels the economy, and he wants that system to continue
and grow in greater measure.
Of course, at first
glance it would appear that the Minister has not been too kind
to the common man’s savings. He has cut interest rates on small
savings by one percentage point. Public Provident Fund and National
Savings Certificates will now earn only 8 per cent and Government
relief bonds only 6 per cent. However, the real returns adjusted
for inflation are close to 6.3 per cent, as high as what they
were during the 1990s.
But Shri Singh’s
real message is that the consumer should gradually move away from
"passive" investments of such nature and shift to mutual
funds or the stock market. That, of course, involves a risk factor,
but the projected returns will more than make up for that.
To encourage such
a move, dividends have been made tax-free in the hands of the
investors. Moreover, shares of listed companies bought after February
28 will be exempt from long-term capital gains tax. Shri Singh’s
aim is clearly to nudge Indians away from the mindset of "safe"
investments and towards a more capitalistic outlook. As the Managing
Director of HDFC Mutual Fund, Shri Milind Barve put it: "Mutual
Funds will become the unbeatable investment destination for investors
as they can now offer upwards of 7 per cent tax-free returns on
some schemes". Will the middle class bite the bullet? That
remains to be seen, but at least the Minister has given it enough
incentives to do so.
Another encouraging
aspect of the budget, and one which in many ways will gel with
the incentive package for spending, is the proposal to create
a social security net for those over 55 years through a Government-backed
pension policy from the LIC. This policy will give a guaranteed
9 per cent return and the Government will meet the shortfall,
if any.
Generally the aversion
to risk-taking among the middle class stems from precisely this
lack of a social security net. That was the reason why the economic
meltdown in South-East Asian countries some years ago played such
a havoc with the lives of crores of people. At that time India’s
cautious semi-socialistic approach had been lauded. Now Shri Singh
is saying in effect, go ahead and take risks and I will back you
up if there is a problem.
But trust has to
beget trust. And it is in this sphere that the Government has
generally been found lacking. Ask any entrepreneur which is the
most hated edifice in any city and without any hesitation he will
point to the income tax office and not, mind you, the police station!
As the Minister put
it in his speech: "Our taxation has to move away from a suspicion-ridden
regime to a trust-based system," Towards that end, he has
proposed a bold revamp of the tax administration and collection
procedure. Allotment of permanent account numbers and other non-core
activities will be outsourced. There will be no discretion-based
system for selection of tax returns for scrutiny and these will
be computer generated. Refunds will be credited electronically
to bank accounts. Individuals will be able to file returns through
a single page form and can even do so online. There will be strict
guidelines on search and seizure.
The aim is simple.
The Minister is asking the middle class to trust and pay their
taxes. Which, of course, is another way of putting more money
into the economy. But will the middle class mindset of hiding
figures from the Government as much as possible go away? Certainly
not very soon, but at least the Minister is giving it an earnest
try.
The bottom line,
though, is: how will it all work if the Government is unable to
discipline itself financially? Of what use will increased revenues
be if all the extra money simply goes into a seemingly bottomless
pit called the deficit? Government borrowings are simply pushing
up interest rates further.
The previous Finance
Minister had promised a fiscal deficit of 5.3 per cent of GDP,
but the actual legacy he handed over to Shri Singh was nearer
5.9 per cent. Now the new Minister has started off with a projection
of 5.6 per cent, but last year’s performance could well be repeated.
The Central Government’s total internal liabilities amount to
Rs 14,35,663 crore as of date, or 58.6 per cent of GDP.
The Minister hates
economic jargon, and the common people will agree with him. But
one cannot get away from the logic of such a deficit. The only
way out is to cut expenditure and increase revenue. But the second
part may be easier than the first, and that means only part of
the job is done.
The biggest culprit
is the bloated level of subsidies, and for obvious political reasons
no Finance Minister has been able to tackle the problem. In fact,
Shri Singh has not even tried. For example, a whopping 30 per
cent jump in food subsidy is projected this year. This, when the
Food Corporation of India godowns are full. But then, there are
drought conditions in States like Rajasthan and Madhya Pradesh,
both of which will also be going to the polls. The Minister had
to keep that picture in mind.
The Minister has
tried to take a peck, as it were, at the problem with his proposal
to cut subsidies on urea worth Rs.700 crore. But already that
has met with a storm of disapproval, even though the Minister
insists that the subsidy cut is essential to meeting India’s commitments
to the World Trade Organisation (WTO). The matter may well have
to be decided by the Prime Minister.
The Minister has
also tried to restructure the debts of both the Central and State
Governments. He has offered to buy back loans from banks provided
they use the money to lower their non-performing assets, which
have assumed gargantuan proportions. As for the States, he has
offered to swap old debts with new ones bearing lower rates. But
will all that help significantly in raising revenue? Only time
will tell.
In effect, Shri Jaswant
Singh has laughed away the deficit. If fully implemented, his
proposals could mean that the country will be spending its way
out of its problems. For a pronounced non-economist like him,
that surely amounts to risk-taking with a vengeance. That may
be the best panacea of all.
*
Senior Freelance Journalist
