3½ looking at 10

However if one justifies bad decisions on the basis of constraints, every silly decision can be interpreted as optimal. There are some who argue that that big-bang reform announcements should be kept outside the ambit of the budget speech, since handling the Left often means that these announcements come to naught. However, in the absence of a state of the union address (the president’s speech doesn’t count), budget speeches since ’91 have been equated with driving reforms. This budget has form, but precious little reform. There are exactly three and a half reform initiatives, justifying a rating of three and a half out of 10. First, the peak tariff rate on manufactured products has dropped to 12.5 per cent.Second, the countervailing duties equal to state taxes now extends to all products, although 4 per cent is too little. Third, there is some standardisation of CENVAT at 16 per cent, though why one should measure cars of 4,000 mm or shorter is anyone’s guess. The half point refers to the goods and services tax, short of a full mark since the timeframe is 2010, beyond the UPA’s time horizon.

In contrast, there are any number of reform initiatives singularly missing: privatisation/disinvestment, labour market laws, infrastructure, FDI limits, accountability and efficiency of public expenditure. On the other hand, can you solve the agricultural credit problem by mandating delivery at 7 per cent? When was the last time you actually scrutinised the keyboard on your PC? The pause button doubles up as a break button also, the reference being to the FRBM target of a zero revenue deficit in ’08-’09. Last year, we pressed the pause button on fiscal consolidation and have resumed in ’06-’07. For the record, the revised estimate shows a revenue deficit/GDP ratio of 2.6 per cent in ’05-06 and a budget estimate of 2.1 per cent in ’06-’07. This is a break rather than a pause on the FRBM roadmap. Even if the budget estimate figure materialises, to get a zero revenue deficit in ’08-’09, we have to slash the revenue deficit by a full percentage point of GDP in each of the two remaining years. Nor should one forget that given the buoyant economy, there was a recommendation that fiscal consolidation should be front-loaded. That slashing by 1 percentage point did happen in ’04-’05; but given the public expenditure commitments, do you think it is feasible? In ’06-’07, we haven’t had to factor in the full wrath of Bharat Nirman, the NREG act and a possible Sixth Pay Commission.

One of the remarkable aspects of budget projections is that you never directly get a GDP growth figure. But since GDP exists in the denominator, you can work backwards and arrive at a nominal GDP growth figure. Nominal growth is real growth plus inflation. No one will give a breakup of the two, since the greater the aggregation, the less the chance of going wrong. If you work backwards, you will find the FM is hoping for a nominal GDP growth of 14.2 per cent in ’06-’07. We will clearly not have higher domestic petroleum product prices. There will be some election somewhere. Thus, an annualised inflation rate of 5 per cent, not more. Ipso facto, we have raised the bar, at least in terms of hopes, of real GDP growth to 9 per cent. Since the budget has no such growth stimulus, again on autopilot.

Trust that savings and investment rates continue to inch upwards, regardless of whether the budget provides such incentives, especially now that the Survey believes interest rates will harden. Even if one believes that the budget speech should avoid broader reform issues and concentrate on expenditure and tax reform, what have we got? The education cess brought in Rs 7,032 crore in ’05-’06 and is expected to net Rs 8,071 crores in ’06-’07. The great thing about cesses is that they don’t have to be distributed to states. Nor did they have to go into a separate fund. They were swallowed up by the black hole known as the Consolidated Fund of India.

In ’06-’07, we of course know that Rs 8,746 crore will be transferred to the Prarambhik Siksha Kosh. But the point is a broader one. In how many of these public expenditure instances is there a link between expenditure and improvement in outcomes? The lesson of the ’90s is that even in social sectors like education and health, private expenditure rather than public expenditure has been the answer. If we don’t have expenditure reform, can we have tax reform? Not quite. MAT, FBT, BCTT and STT violate the rationale of tax reform, but which FM has ever said mea culpa? Collective fringe benefits are quite distinct from individual perks. Service sector taxation is not completely integrated into a value added framework, but we must increase the rate to 12 per cent and include more service sectors, sparing of course doctors and lawyers.

We won’t scrap the central sales tax, despite it being a commitment. And there is a lot of devil hiding in the detail of removing end-use exemptions on customs and excise. For once, I agree with the CPM. This is a regressive budget, though not in the sense the CPM means. Why are people relieved then and why has Mr Chidambaram obtained such high ratings? Probably because people expected worse. Status quo has largely been maintained.

The writer is secretary-general, PHDCCI