Budgeting for growth

This is Union Budget week. We tend to forget this, thanks to World Cup cricket, the war in Iraq and the pre-occupation of many with more important issues like the Ayodhya temple and cow slaughter in Madhya Pradesh. If there is any public discussion on the coming Budget it is about which elements of the Kelkar Committee’s recommendations on personal income tax will be implemented and which, left out. So are budgets important anymore? Time was when public attention was riveted on the price of petrol, cooking gas, cigarettes and bathing soap and the middle classes rushed to shop in advance of B-Day. If you had stocked up on talcum powder and the minister did not tax it, you felt cheated!

Those days are gone. Budgets are less about how much your daily necessities will cost and more about the direction of policy. This year there has been undue focus on tax policy because of the radical recommendations of the Kelkar committee. If the proposals had been accepted in toto in this year’s budget, it would have proved an important turning point. Taken as a whole, these proposals would have reduced the tax burden on the middle class, increased it on corporates and made personal income taxation more transparent. However, it would have required the government reneging on its promises to households and investors. Clearly this government is not ready for this, hence the prime minister’s assurance that his government will pick and choose from Kelkar’s proposals. The picking and choosing will have to be cleverly done to ensure revenue neutrality. The government can neither afford to increase the tax burden on the middle classes nor can it afford to give up tax revenues. Herein lies Jaswant Singh’s challenge. Budgets are about more than just tax policy, and certainly not just direct taxes. In the past, ministers have used the budget as an instrument of broad-ranging policy reform. Singh is also expected to make some policy statements related to agriculture, welfare, tourism, foreign investment and infrastructure.

The essence of a successful budget lies, however, not in the laundry list of policy announcements but in the mood it imparts. With economic growth below potential for the past four years the BJP government must alter investor and consumer sentiment and bring in the feel good factor. Pre-occupation with sectarian agendas, and such like will undoubtedly neutralise the positive impact of even the most feel good budget. In the end, this Budget is not about whether dividend tax will go or whether the minimum taxable income level will be raised. It is about making investors and consumers feel that the government is focussed on economic growth and not just beef-eating.