Budget 2004, Work in Progress

At many levels, the finance minister8217;s Budget Speech was a disappointment. Manmohan Singh and P. Chidambaram have done budget speeches ...

At many levels, the finance minister8217;s Budget Speech was a disappointment. Manmohan Singh and P. Chidambaram have done budget speeches before, which painted a vision of economic reforms, and got domestic and private investors excited about India8217;s future. This budget speech had little to offer in terms of soothing investors who were rattled by the CMP and by the airtime given to Left politicians. For this reason, it appears that the budget speech will do little in terms of inviting and promoting investment, as compared with trends in earlier months.

There are, however, a few elements of useful tax reform in the budget. The integration of goods and services taxation in the sense of a two-way flow of CENVAT credits is a positive. Yet, this apart, the budget does not embark on important tax reforms. Tax rates for goods and services continue to be different. We are still stuck with selective taxation of a few services and not all services. Customs rates have not come down. Most important, the entire bestiary of exemptions has been left intact. Similarly, the structure of subsidies is largely untouched. Small savings rates remain. The implicit subsidy to the Employees Provident Fund Organisation, through full income tax exemption, has been left intact.

It appears very odd that despite a profuse sprinkling of expenditure proposals, the revenue deficit is projected to drop by a full percentage point of GDP. This is obviously a very desirable outcome. But there is a need for greater scrutiny in understanding how this was done. Will this improvement in the revenue deficit be a lasting accomplishment, or is it a one-off? Major tax reforms have not been attempted, which leads to concern about whether the country is yet on the path to robust fiscal consolidation.

The education cess is astonishingly confused. Education is certainly important, but then what is the main body of tax revenue for? Will we have a cess for defence, because defence is important? Or a cess for the police, because law and order is important? The government should operate within a clear fiscal framework, where tax revenues are used to fund their public programmes. It is wrong to place new taxes to fund specific expenditures.

In terms of expenditure, Manmohan Singh had got hopes up when he talked about reforms on government functioning. He recognised that the existing mechanisms of expenditure on the part of government are hopelessly dysfunctional and fail to work effectively in reaching the poor, or in producing public goods. Yet, the budget speech went on to merrily send large amounts of resources through the dysfunctional government system. Does this Cabinet really believe that money spent in this manner will be money well spent? It would have made more sense for the FM to have announced a massive effort on closing down existing mechanisms through which the government operates, and embarking on a quest for new institutional arrangements. Instead, the budget speech displays a naive willingness to believe that spending more money on programmes for SC/ST communities would actually help them.

Certainly, there were several flickers of good ideas in the budget speech, which have the potential of yielding genuine institutional change. A food stamp pilot will commence. The new pension system will gain legislative strength. Small Sector Industry dereservation will take place for 85 more items, out of 650. Drinking water schemes are being taken closer to local government. The commodities market will be integrated with the securities markets, thus allowing the agricultural sector to benefit from the modern institutional development of the securities markets. For observers who were pessimistic about modern and rational economic policy emerging out of a government under the shadow of the Left, there are a few rays of hope. The FM has clarified that selling shares in PSUs will, indeed, continue. Foreign Direct Investment limits have been raised in some sectors.

The problem is that these attempts at reform are, at best, lukewarm. Perhaps this is all that Singh and Chidambaram could do, burdened as they are with a dubious coalition. We may recall that it took Atal Bihari Vajpayee roughly two years to assert his independence, and shake off the policy constraints of the RSS. In a similar fashion, it may take a while for the more rational elements within the UPA to assert themselves, and gradually bring economic policy on track in the years to come.

Story continues below this ad

Crafting a good economic policy is a difficult and time consuming process, and this team will surely need to settle in, get major committee reports written, and cobble together the political support for reforms. As the FM put it, 8220;Progress is not always on a linear path, nor is it inevitable8221;. Rational thinking in Indian economic policy has systematically made progress in the last 20 years, although there have been many twists and turns.

We are already in July 8217;04 8212; as the FM himself underlined 8212; and in some ways, the focus would now shift to the February 8217;05 budget. By that time, the PM and the FM, and their policy teams, would have settled in; important committee reports would have been produced and publicly debated; possibly better equations with coalition partners would have emerged. Budget 8217;04, then, is best described as work in progress.