The evening after

Await the full fury of the UPA government8217;s expenditure mayhem

If you hear the expression 8216;evening out8217;, what image does it conjure up? Romance in the candle-light, wining, dining, dancing, films, plays: certainly not North Block. The Fiscal Responsibility and Budget Management FRBM Act requires a quarterly review of the Centre8217;s revenue and expenditure and the second quarterly report for 2006-07, which is also the mid-year review MYR, is now available. These could have been bald financial statements, but have become mini Economic Surveys. The MYR says, 8220;Despite impressive performance on revenue collection front, all the three mid-year performance benchmarks prescribed by the FRBM Rules, namely non-debt receipts, fiscal and revenue deficits as proportions of BE, were short of the target, and in relation to fiscal deficit and revenue deficit mid-year benchmarks, inferior when compared to the corresponding period of the previous year.8221; We did better in 2005-06, particularly on the revenue deficit. The MYR then adds, 8220;Government is confident that this mismatch will even out in the second half of the year, proceeding more or less on budgeted lines. After a similar breach of the mid-year benchmarks, the year 2005-06 ended with the key parameters in broad conformity with FRBM targets. Figures for October 2006 8212; for example, a revenue surplus in October 8212; indicate an evening out is already on its way.8221;

That8217;s where I picked up the expression 8216;evening out8217; from, and I wonder what it means. Does it mean pleasure and a break from work, suggesting we can now deviate from FRBM disciplines? The budget is imminent and consultations have begun. There will be much talk of 8220;the common man8221;. What this expression means is anyone8217;s guess. The urban middle class is hardly representative of the common man. However, for what it8217;s worth, the average citizen wants employment opportunities, low inflation, public services and physical and social infrastructure.

Three questions arise. First, how much of this is the government8217;s responsibility? Second, if it is the government8217;s responsibility, is that government the Centre, state or local body? Third, even if the Central government is responsible for some of this, how much has that got to do with the budget, as opposed to policies emanating outside North Block? That8217;s the problem with hype around the budget and especially with Part A of the budget speech, where all the big bang policy announcements like flagship schemes are present. The budget is really about Part B, the Centre8217;s annual statement of revenue and expenditure. If expenditure exceeds revenue, we do have a problem, because someone has to pay for that deficit. These costs include opportunity costs of resources that could have been spent elsewhere.

Hence FRBM is important, because longer-term growth and inflation issues can be adversely affected. What does MYR tell us about expenditure in the first six months of 2006-07? First, out of the total budgeted expenditure in 2006-07 the actual figure isn8217;t important, 44.7 per cent was spent in the first six months. In 2005-06, only 41 per cent was spent in the first six months and remember that expenditure is invariably concentrated in the second half of the year, particularly in the month of March. Second, compared to last financial year, revenue expenditure increased by 22.7 per cent while capital expenditure decreased by 7.7 per cent. Third, it is non-plan expenditure rather than plan expenditure that has shot up. There are problems with the differentiation between capital and revenue expenditure and plan and non-plan expenditure, but that point shouldn8217;t be pushed too hard. Clearly, desired forms of expenditure can be curtailed and undesired forms continue unbridled. Despite concerns about efficiency of public expenditure and whether these are the best uses of public resources, one can perhaps concede that the intention behind Bharat Nirman and the eight flagship programmes Sarva Shiksha Abhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child Development Services, National Rural Employment Guarantee Scheme, Jawaharlal Nehru National Urban Renewal Mission is laudable.

According to budget estimates, we will spend Rs 82,381 crore on them in 2006-07. But we will spend Rs 44.533 crore on major subsidies, and these aren8217;t desirable, because they aren8217;t targeted. And subsidies like food and fertiliser are also one reason why non-plan expenditure shot up in the first six months. The moral of the story is that the UPA government can8217;t possibly control expenditure and the full fury of expenditure mayhem will be unleashed only when flagship programmes are expanded as they are bound to and Sixth Pay Commission takes its toll.

So we have to figure out ways of increasing revenue and that essentially means tax revenue. Exemptions and concessions don8217;t lead to revenue increases; they lead to revenue losses. But, at this time of the year, national apex chambers like CII, FICCI and ASSOCHAM and Other Backward Chambers will send petitions, demanding more concessions. The MYR states: 8220;Removing the plethora of tax exemptions and concessions is important in this context. Tax expenditure in 2006-07 is estimated at Rs 1,00,147 crore. Such exemptions and concessions distort resource allocation and stunt productivity. They also result in a multiplicity of rates, legal complexities, classification disputes, litigation, higher cost of tax compliance and administration. Such exemptions have been justified for promoting balanced regional growth; dispersal of industries; neutralisation of disadvantages on account of scale of operation and location; and incentives to priority sectors, including infrastructure. To avoid rent seeking, these should be subject to a sunset clause, as tax exemptions often create pressure groups for their perpetuation.8221;

There is a clear typo. What is tax expenditure? What is almost certainly meant is that revenue forgone as a result of exemptions and concessions personal, corporate, indirect tax is Rs 1,00,147 crore, enough to fund all the flagship programmes we want while adhering to FRBM targets. Exemptions are the main reason why central excise collections don8217;t increase, despite growth. In six months, the largest growth has been in service tax, followed by corporation tax and customs. Nor will we need anti-reform measures like fringe benefit tax Rs 1,153 crore in six months or banking cash transaction tax Rs 234 crore. That should be the big bang reform idea for budget 2007-08. Scrap all tax exemptions and concessions and tax revenue will increase by at least 5 per cent of GDP. Unfortunately, we also know big bang theories are no longer fashionable. Given the status of tax reform today, with more rather than fewer exemptions, unsteady state is our evening out.

The writer is a noted economist