Opinion Small-bang reform
The Budget tries to fix taxes and the deficit. But why not build on that?
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Despite hype over the Union Budget,it is only one of several instruments the Central government possesses and many items are state (or even local body) subjects. Consequently,there is merit in the budget sticking to its core area of expenditure and taxes,since there are options outside the budget for introducing big-bang reforms. During UPA-I,flamboyant announcements were made and subsequently not implemented. Given the present finance ministers style,one ought not to have expected big-bang,followed later by an even bigger whimper. Prior to the budget speech,expectations were centred on the withdrawal syndrome,interpreted as tax reduction stimulus and not public expenditure or monetary policy. The FM altered these expectations by mentioning three challenges: GDP growth of 9 per cent,raising it to 10 per cent; inclusive development; and public delivery. He then followed this up by saying that budget cannot be a mere statement of government accounts (which it constitutionally is),but must also impart vision. If that is the criterion and if the bar is thus raised,a budget is bound to be judged more harshly. What is the vision? This is also about packaging,not just content. What has happened to FDI in retail,pensions,insurance,labour market reforms?
What about reforms to stimulate the four identified prongs for agriculture: production; reduction in wastage; credit; and food processing? Most agricultural reforms are state subjects. How does the Centre hope to unleash a second green revolution in eastern India with Rs 400 crore? Will the grain distribution problem be resolved if the FCI can hire private godowns for seven instead of five years? One should have promised less and delivered budgetary staples expenditure and tax reform. There is a vision in this budget,but it isnt what the FM promises. The vision of the budget is fiscal consolidation and tax reform. Thats what the speech should have focused on. This becomes easier if a short and crisp budget speech is delivered,not one meandering over 12,590 words and 189 paragraphs. This is not criticism about missing big-bang content. It is a criticism about not building on tax reform and fiscal consolidation. We will have GST and direct tax reform from April 1,2011. Note however the careful choice of language. On the Direct Tax Code,the FM is confident that the government will be in a position to implement,while on GST,it will be my earnest endeavour. Since the latter involves the states,this is understandable.
Lets take indirect taxes first. On the domestic,the proposition is simple. We must unify and standardise GST at 12 per cent. Therefore,we must move central excise and service taxation towards that. We arent ready to do move services to 12 per cent,let it remain at 10 per cent. But excise can move to 10 per cent. However,am I implementing this rule uniformly? No,on excise,I am tinkering around on replaceable kits for domestic water filters,corrugated boxes and cartons,toy balloons and latex rubber,not to forget large cars. Perhaps large cars,cigarettes and petroleum products should be treated differently. Why am I bucking the standardisation objective for the others? Of course,there is lobbying. A FM interested in tax reform should resist the lobbying. This discretionary tinkering is reminiscent of pre-1991,and not deserved by a country wishing to move towards GST. We have this discretionary treatment in services too,such as discrimination against freight movement by railways. There are several special dispensations in customs,too many to catalogue. This is not the hallmark of a reformist FM,reform interpreted as the small bang of tax harmonisation. There is not much to say on personal income taxation,except the obvious about lower direct taxes neutralising higher indirect taxes,with inflationary contribution from the latter. There is a moot point about MAT though. True,effective corporate tax rate is 22 per cent. This must increase and is an issue that will be addressed in DTC in 2011. For one year,might it not have been better to leave MAT at 15 per cent and surcharge at 10 per cent?
On tax reform,the FM hasnt delivered as much as he should have. But he has moved on fiscal consolidation,committed to a debt/GDP reduction road-map paper,accepted rolling fiscal deficit/GDP targets of 5.5 per cent in 2010-11,4.8 per cent in 2011-12 and 4.1 per cent in 2012-13 and given deficit numbers with off-budget items included. There is greater transparency and no numerical legerdemain. In passing,this is the first time budget papers (not subsequent press conferences) mention nominal GDP growth expectation of 12.5 per cent,which is 1 percentage point lower than what most budgets have tended to assume. This is probably split into 8.5 per cent real growth and 4 per cent inflation. Even if inflation is measured by GDP deflator,4 per cent may be on the low side. If inflation is higher,that makes it easier to reach the deficit ratio. Plus Rs 40,000 crore from disinvestment and Rs 35,000 crore from 3G auctions (this number is hidden in the FRBM statement). 5.5 per cent in 2010-11 shouldnt be difficult. Since CSO wont change GDP base every year,subsequent budget speech announcements,there is tight control on expenditure,particularly of non-plan variety. For example,if inflation is 4 per cent,real growth in expenditure is only 4.5 per cent.
Inevitably,people ask the question whether the budget does anything for growth and inflation. At one level,this isnt a question that should be asked. Both are determined and influenced by extra-budgetary factors. For instance,growth of 8.5 per cent will be a function of what happens to interest rates and what Indra does. All one knows is 7.2 per cent in 2009-10 (both Survey and budget seem to think this will be closer to 7.5 per cent) was driven by public consumption expenditure and that will be reined. Will private consumption expenditure driven by direct tax cuts neutralise Pay Commission arrears and farmers debt relief,both missing this year? Will exports recover on a 2007-08,and not 2008-09,base? Will private investments recover? The budget doesnt directly help answer any of these questions,except the signaling of fiscal consolidation,tax reform and financial sector liberalisation (more bank licenses). And quite clearly,several provisions in budget will contribute to inflation. If at all,North Block seems to think inflation will become less of a worry than it is today.
Given constraints,it is a decent small-bang budget. Following Surveys trend of setting bands,it scores 6.50,give or take 0.25,out of 10,and would have scored more had the message been loud and clear.
The writer is a Delhi-based economist
express@expressindia.com
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