Survey proposes, budget disposes

As feared, the fiscal deficit is out of control. Against an estimate of 4 per cent for 1999-2000, the revised estimate of the fiscal deficit is 5.6 per cent. For purposes of comparison, this is equal to almost 7.1 per cent under the old series. For the next year, 2000-2001, the Finance Minister has budgeted a fiscal deficit of 5.1 per cent. Given the Government’s total loss of control over the fiscal situation, it is reasonable to expect that there will be a slippage of at least one to 1.5 percentage points, taking the fiscal deficit to a high of at least 6.5 per cent. For purposes of comparison, this will be equal to 8.3 per cent under the old series. My conclusion is that there has been an abject failure in the matter of fiscal consolidation.

Amidst the overall sense of gloom, there are some redeeming features. I am happy to note that the zero-base Budget scrutiny has resulted in axing 69 schemes. The interest rate on GPF has been reduced by one per cent (although I cannot understand why the same should not apply to EPF). Rural Infrastructure Development Fund (RIDF) has been enhanced to Rs 4,500 crore and a Micro Finance Development Fund with Rs 100 crore has been announced. The budgetary support for the power sector has been enhanced. Allocations for elementary education, drinking water and child welfare have been increased. Customs duties have been reduced for imports relating to IT and telecom. A beginning has been made to cut the import duties on crude oil and petroleum products. These are few features for which the Finance Minister deserves to be commended.

The Economic Survey points out worrying developments. It points out:

* That non-oil imports grew only by 1.1 per cent in April-December 1999.

* That the current account deficit has dropped to a very low level.

* That FDI flows were low in 1998-99 and continued to be lower in 1999-2000, and this was a source of serious concern.

* That there was a sharp slump in investment, total investment declining by about 0.5 per cent in 1998-99.

* That gross domestic savings declined sharply in 1998-99 to 22.3 per cent of GDP.

* That foreign direct investment declined for the second year in succession.

* That imports of capital goods during April-November 1999 were about 30 per cent lower than the value in the corresponding period of the previous year.

* That RBI credit to the commercial sector had declined.

All these should have jolted the Government into action. There was talk of a harsh Budget. Colourful phrases like biting the bullet’ were employed freely. The Budget speech of Sinha has been a great disappointment. No attempt has been made to address any of the fundamental concerns highlighted in the Economic Survey.

Fortunately, Sinha has launched only a few new schemes. Four days ago, I had pointed out the number of promises made last year which had not been fulfilled or acted upon so far. This year he has announced the Prime Minister’s Gramodaya Yojana, the Jan Shri Bima Yojna and a new central scheme for SSIs. I hope at least these promises will be carried through this year.

My biggest regret is that the reform attempted by him last year in the excise duty regime has been derailed this year. Instead of carrying forward the reforms centered around a single excise rate, the Finance Minister has introduced a dual excise regime. Now we will have CENVAT at 16 per cent which will be Modvatable, but there will also be special excise rates of 8 per cent, 16 per cent and 24 per cent which will be non-Modvatable. Besides, excise duty on capital goods will now be Modvatable over a two year period. All these have resulted in a complex and distorted excise duty structure. Sinha has undone the good work he began last year. I am also disappointed that he has continued the surcharge on customs duties at 10 per cent and has further applied to it to the peak rate of 35 per cent. He has also extended the SAD to traders, besides manufacturer-importers who were covered earlier.

The worst blow has come in the area of direct taxes. The Finance Minister has not only retained the surcharge of 10 per cent that he promised to abolish this year, but he has increased the surcharge to 15 per cent on the highest bracket. He has tampered with the export benefits for exporters, by reducing the 100 per cent tax incentive to 80 per cent this year, with a further threat that the entire benefit will be phased out in a period of five years. The distribution tax on dividend has been increased from 10 per cent to 20 per cent. Likewise, the final withholding tax on income disbursed by debt mutual funds has been increased from 10 per cent to 20 per cent. He has also interfered with the MAT regime which had come to be accepted by business during the last three years. All these will send wrong signals to income earners and businesses.

True to his past track record, Sinha has raised taxes. According to my calculations, the additional resource mobilisation will be Rs 1,824 crore under indirect taxes and Rs 5,080 crore under direct taxes. Thus a new tax burden of approximately Rs 7,000 crore has been imposed upon the people of this country.

Sinha’s speeches are replete with reassuring words and phrases. While he may not have done any permanent damage to the reform process, he has clearly made no advance whatsoever. Reforms are stalled. The tax regime has been distorted. While the economy may grow moderately despite Sinha’s Budget, he has missed a great opportunity to put the Indian economy back on the high growth path that it enjoyed in 1994-95, 1995-96 and 1996-97.

— The author is a former Finance Minister of India.