Tin is a soft metal

If you look at Union budget estimates for 2002-03, 83 per cent of expenditure is revenue expenditure. The fiscal deficit is a measure of how much the government borrows. Borrowing increases repayment costs in future, apart from exerting upward pressure on interest rates. Had the fiscal deficit been used to finance capital expenditure, not too many people would have disagreed. However, the fiscal deficit is used to finance revenue expenditure. Across all varieties of the political spectrum, everyone agrees the fiscal deficit must be slashed. There is consensus. But that’s not much of a consensus unless we agree on how revenue expenditure will be reduced. Or agree on how revenue will be increased.

February is the cruelest of months because of the hype associated with the budget. A colossal amount of media and citizen time is wasted. All kinds of things are expected in the budget, as if it alone will propel India from the 5.5 per cent annual GDP league to the 8 per cent category. We know the agenda of reforms required to achieve that transition. We have been talking about such reforms since 1991, even if we have failed to implement most. But any scrutiny of that agenda will tell us that most reforms cannot take place within North Block alone. Nor do they have much to do with the budget.

The budget speech has two parts, Part-A and Part-B. Part-A is where these wonderful policy announcements are made and chambers of commerce stand up and applaud (and give the FM 9 marks out of 10) if the Industrial Disputes Act is mentioned. It is true that since 1991, budgets have become identified with such announcements. But it is also true that announcements without implementation amount to nothing. According to the Constitution, the budget is an annual statement of the Central government’s income and expenditure. Without Parliament’s sanction, and without this statement, money cannot be spent out of the Consolidated Fund. The budget should be about Part-B, the statement. The FM knows what the reform agenda is, which is perhaps the reason he has scrapped the system of pre-budget consultations and instead asked 150 assorted individuals to send in suggestions. The FM knows the political economy problems associated with liberalisation. Hence, he has more or less told us that wonderful policy announcements will happen outside the budget. This budget will be about Part-B. Which is not such a bad idea.

Etymologically, the word “budget” means a bag. But even on Part-B, the FM has no bag of tricks he can surprise us with. Even on Part-B, the limited degree of freedom he has makes the hype unwarranted. Consider expenditure. Depending on how you define committed expenditure, anything between 85 and 90 per cent of total expenditure is outside the FM’s control. At best, the FM can play around with 10 per cent.

Consider the expenditure items. Plan expenditure is determined outside finance ministry. Within revenue expenditure, future interest payments can be slashed by reducing interest rates on small savings. But thanks to the Rajnath Singh committee, that can’t be done. Genuinely poor people don’t have money to invest in small savings. But the vocal urban middle class does and they must be given risk-free real rates of return of more than 10 per cent. That doesn’t solve the problem of present interest payments. But because privatisation and using those receipts to retire public debt is a question mark, there isn’t much scope there either. Because of security threats, defence expenditure must increase. All subsidies are not shown as subsidies in the budget. Those that are (food, fertiliser, oil sector) amount to Rs 40,000 crore a year. Obviously, the poor don’t get these subsidies. But they can’t be touched because they are in the name of the poor. While the Central government only employs 3.2 million people, pensions are a burden. But pension reform is outside the budget. Given the resource squeeze, there must be some prioritisation of where expenditure ought to be. Despite a decade of reforms, we don’t have that consensus and it is not surprising that the FM has very few degrees of freedom on expenditure.

Nor does he have much scope on revenue. Even if there is an annual exemption limit of Rs 1 lakh a year, farmers can’t be made to pay taxes. There are high compliance costs on tax payment and Kelkar’s procedural simplifications (like tax information network, or TIN) are about procedural simplifications. But compliance costs are also about exemptions and courtesy the Rajnath Singh committee again, you can’t touch those, for direct (personal and corporate) and indirect taxation. So this budget will be about TIN and, remember, tin is a soft and weak metal and doesn’t have much use unless it is alloyed with “better” metals.