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No 'Dream Budget' this time

February 23, 2005

Those who are expecting a repetition of Finance Minister Chidambaram's 1998 'dream budget' in the coming Budget must necessarily come to grief.

For one thing, the UPA coalition government  is different from the United Front of 1997. For another thing, government has tied itself down with so many expenditure commitments, including the raising of interest on EPF and the commitment on implementing the national common minimum programme.

Typical of the pressures on the coalition government is the demand by Sitaram Yachury of at least Rs 50,000 crore (Rs billion)s for implemetning the common imumum programme of the UPA.

Wish lists are galore leaving the finance minister precious little elbow room. On the one hand, the known sources of revenue offer a very limited potential.

For a long time the government had gone on accepting expenditure commitments without matching revenue resources in sight. On the other hand, the promised revenue receipts from ministries and state governments never materialised.

Only larger and newer demands are being made year after year making the task of balancing expenditure and revenue in the budget increasingly difficult.

For quite some time now, in its desperation. The ministry of finance has been driven to ignoring the distinction between government's own resources and the government's owed funds which it holds purely as a banker and meeting consumption expenditure such as salaries and allowances with these borrowed funds.

Luckily, one chronic feature at the backdrop of India's finance system viz. balance of payment problems is absent.

A point that needs to be emphasised is that the budget has lost considerable influence in the last few years. It is no longer the principal instrument for raising resources.

After the coming of the oil economy the government learnt how to raise resources without taking help of the budget. Thereafter, this principle was extended to many other fields.

In recent times examples are galore where the government had raised handsome resources without taking the help of the budget, the latest being the ludicrous example of the government issuing an ordinance to raise around Rs 800 cr from one company, forgetting that the ordinance directly flies in the face of a Supreme Court judgement.

Nor is the budget as important as it was in the past for announcing new policy measures. The national common minimum programme, which was announced when the present government came to power, has given a broad indication of the policy parameters of the government.

It is therefore difficult to do any thing outside these parameters. Also, the newspapers in the last few weeks are flooded with a number of announcements like, for instance, the raising of the FDI ceiling in aviation and telecom sectors or the government permitting FDI in the construction sector.

In the olden days all such announcements could normally be made in the budget. In this situation the budget has largely become a statement of receipts and expenditure along with a statement of proposals for new taxes or alterations of the existing taxes, both in the direct taxation and the indirect taxation.

Only a few years ago government followed the practice started in colonial times of the Finance Member of the Viceroy's Executive Council starting his budget speech at 5.00 pm sharp when it is 10.00 am in London when the London Stock Exchange just opened to bear the impact of Government of India's new tax proposals.

About 2-3 years ago this practice was stopped and the finance minister started making his budget speech at 11.00 am. Also, the advent of computers has taken away another aspect of the secrecy associated with the budget.

As the Central Excise and Customs proposals take effect from the midnight of the day when  the budget is presented, there was a practice in the past of ministry of finance sending officials with copies of the new notifications to the Central Excise and Customs Offices the same evening so that the taxes could be enforced from the midnight, without any one getting any chance to manipulate.

That practice  is thankfully over with the introduction and extension of computer system in the department.

Now all the proposals can be sent automatically by the Internet. Where is, therefore, the need for any secrecy that is associated with the budget?

The government could announce the tax proposals without any ado about it and study the reactions of the public for a month or so before getting the proposals passed in the Parliament.

In the USA the budget is not associated with such secrecy as is done in our country.

A point that deserves the finance minister's serious attention is whether the practice of emphasising the fiscal deficit  should be followed any longer.

Fiscal deficit was unknown before 1990-91. The budget was always concerned with the budget deficit of the revenue deficit and proposals were woven around it.

It was only when a massive IMF loan was applied for in 1990 or 1991, that the IMF put containment of fiscal deficit as a necessary pre-condition for granting their loan and, thereafter, the practice developed of expressing the government deficit, not only as a revenue deficit but also as a fiscal deficit.

Now that we are well out of the IMF's reach, the finance minister could consider going back to the pre-1991 practice of expressing the government's deficit only in terms of the revenue deficit.

Under the indirect taxes the principle of VAT will be established. This will change the entire scenario. There is little scope for making any changes in the Central Excise or Customs duties structure, except by way of rationalisaton and reduction in the number of slabs.

It is possible that customs duties will be further lowered, both in order to bring our duty structure in line with the WTO requirements and also in line with the rates prevailing in the SAARC countries.

The area of taxation of services is sure to be enlarged. As regards income tax there has been significant lowering of the tax rates in the last decade.

I do not think there is scope for further reduction of the tax rates, nor is there any scope for increasing the tax rates with a view to subjecting the rich to high level taxation in keeping with the strident demand of the UPA's left allies.

The general principle of lowering the rates of income tax, while doing away with many of the exemptions, which bedevil our taxation scenario, should be continued.

A few years ago when  the tax rates were substantially lowered that should have been the right time of coupling it with the withdrawal of many of the exemptions.

Unfortunately, that was not done to pander to public sentiments. The government should return to that agenda.

With the GDP growth rate in the region of 8 per cent and with the corporate sector recording very impressive records of growth and profitability, there is sure to be a high degree of revenue buoyancy if only the government could concentrate on better tax administration, greater compliance and extending the tax net.

These should demand attention of the finance minister than the hackneyed business of fiddling with the tax rates. As far the Left allies the finance minister should realise that they would go on projecting their wish-lists and giving threats in order to catch the ears of their constituents, but will not cross the Lakshmanrekha.

On no account should there be any let-off in the process of economic reforms.

The author is former revenue secretary to the government of India.

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