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Dull is good

In this economic,political climate,the budget couldn’t have announced big bang reforms

Written by Bhaskar Dutta |
March 7, 2013 3:17:23 am

P. Chidambaram did not have an easy task. The budget for 2013-14 had to achieve several pressing but potentially conflicting goals. Perhaps,the finance minister’s most important objective was the need to contain the fiscal deficit. Successive years of government profligacy resulted in a huge public debt and a possible downgrading by ratings agencies. It is also imperative to revive the growth process since the rate of growth is at its lowest level in a decade. Finally,with the national elections just round the corner,minimal political compulsions had to be satisfied.

How could a fiscally responsible and contractionary budget possibly stimulate the growth process or permit any degree of populism? Surely,something had to give? Somehow,Chidambaram seems to have squared the circle. He has performed a delicate balancing act by attempting to take only tiny steps towards achieving each of these objectives. So,the budget estimates indicate a small reduction in the fiscal deficit. Surprisingly,there are no harsh doses of additional taxation. Since the budget also contains some measures to stimulate the capital goods industry,the budget is mildly growth-friendly. Finally,there are some sops for the middle and lower income classes combined with a mild increase in the tax burden of the rich. Importantly,the finance minister has resisted the temptation to move too far along the populist route.

The most pleasing announcement has been the revised estimate for the fiscal deficit for 2012-13. This is marginally lower than the estimate presented by Pranab Mukherjee around this time last year. This is still a most creditable achievement because it has been achieved despite a fall in the GDP growth rate — this must have resulted in a corresponding fall in tax revenue collections. This suggests that the finance minister has been able to restrict government expenditure to below the budget estimates,possibly because of recent policy measures aimed at reducing the subsidy burden. The potential long-term benefits of a reduction in the subsidy bill cannot be overestimated.

Chidambaram has been relatively lenient in so far as new taxes are concerned. Additional tax collection from direct taxes will be only Rs 13,000 crore. The corresponding target for indirect taxes is more modest — only Rs 4,700 crore. There has also been a small attempt to make the overall tax structure more progressive. Direct tax increases are clearly targeted at the rich,with those earning over Rs 1 crore being subjected to a new surcharge. On the other hand,the tax burden for income earners in the Rs 2-5 lakh range will be slightly lower. This is combined with an increase in tax rates for corporations with taxable incomes exceeding Rs 10 crore. The new indirect taxes are also on goods consumed by the rich. For instance,there have been modest increases in the excise and customs duties on SUVs,as well as on the excise tax on mobiles that cost more than Rs 2,000. All these changes will induce the UPA to claim that the budget is pro-poor,anti-rich.

Total expenditure is estimated to go up by 16 per cent over the revised estimates for 2012-13. This has caused a few raised eyebrows. Since the nominal GDP growth rate is estimated to be just over 10 per cent,the expenditure to GDP ratio will actually go up over the year. Moreover,the rather large increase in targeted expenditure is despite a sizeable projected reduction in the overall subsidy bill. This does not quite jell with the idea of a finance minister trying desperately to cut expenditure in order to slash the fiscal deficit.

Perhaps Chidambaram felt that he had already slashed expenditure so much during the current year that there is no further scope for expenditure compression. He has also had to make adequate provision for all the existing flagship social sector schemes of the government as well as an additional sum of Rs 10,000 crore for the food security bill,which is expected to be passed during the next year.

This raises an obvious conundrum. How does Chidambaram hope to reduce the fiscal deficit by almost half a percentage point when the expenditure to GDP ratio is expected to go up,and without any large dose of additional taxation? The somewhat uncomfortable answer is that he has had to take recourse to some heroic assumptions about revenue collections during the course of the coming year. First,he hopes that proceeds from disinvestment will be twice the amount that will be collected this year. How will this target be achieved? The behaviour of the Sensex has been quite erratic in the recent past and so there has to be a large degree of uncertainty associated with this figure.

Second,tax revenue collections at existing rates are supposed to go up by 18 per cent. This requires a sizeable increase in the tax to GDP ratio. We have been told over the years that the tax administration has been tightened and so compliance has increased. But this surely implies that it is foolhardy to expect any significant jump in tax compliance or buoyancy during the next year. Ideally,the budget should give us a more disaggregated picture of expected tax revenues under different heads. No finance minister has done that so far. Unfortunately,Chidambaram is no exception.

A leading member of the opposition has described Budget 2013-14 as “dull and boring”. But,a budget is not expected to be a fast-paced thriller. In fact,there is some merit in keeping tax rates relatively stable (boringly so!) because entrepreneurs hate frequent changes in the economic environment. It is also unrealistic to expect any big-bang reforms given the confluence of current economic and political factors. Perhaps,the government could have tried harder to introduce the GST. Other than this,it is difficult to find any major flaws in the budget.

However,the proof of the pudding is in the eating. Chidambaram can claim that this has been a job done well only if the actual revenue and expenditure figures this time next year turn out to be close to the budget estimates.

The writer is professor,Department of Economics,University of Warwick,UK,express@expressindia.com

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