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Home > Business > Special

An anti-reform budget?

Surjit S Bhalla | March 01, 2007

The 10th anniversary of Mr Chidambaram's dream Budget was presented by a person (obviously) 10 years older, and now past 60. The tragedy is that it shows.

There was so much he could have done, but he chose to take the safe, well-travelled route. A route travelled by only those who believe in eternal, glacial gradualism. A gradualism that means that you can even walk backwards, while all the time claiming that you can walk on water. Also showing the age was a hardening of the arteries.

This particular FM has always had a stubborn streak, and by golly, I brought some ingenious taxes like the fringe benefit tax and the cash transactions tax, and by golly I am not only going to keep them, but also enhance them.

Few finance ministers, anywhere in the world let alone India, are as lucky as this one. When he assumed office in May 2004, the economy was booming, and some even said it was shining. Two major economic reforms were in the system when he took office -- reforms on taxes and reforms on interest rates.

Two tax reports (both under the supervision of Dr Vijay Kelkar) were already in the process of implementation, including the elimination of long-term capital gains tax, and a reduction of short-term capital gains tax to 10 per cent, and the introduction of the securities transaction tax. Major interest rate reforms, in the form of interest rate reforms on small savings, had also already been initiated.

Such interest rates on postal deposits were yielding 12.5 per cent, nominal, and tax-free, in June 1999, a time when inflation was a subdued 4 to 5 per cent. These rates were cut by just 50 basis points but they set in motion a path that has made possible the structural break in the Indian economy. The same structural break that has caused industry to boom (because of radically lower borrowing rates), tax receipts to zoom, and the Budget deficit to be brought down to historically low levels.

Now think back and do a "mental" experiment. Would the UPA government have cut the interest rate on small savings deposits? No, because that would go against their slogans�we are for the aam aadmi, and aam aadmi needs high deposit rates for the several lakhs of deposits. Equally, would the UPA FM have reformed the capital gains tax system, a system with high nominal tax rates to make the aam aurat feel good, but with zero tax collection. Of course not, it hurts our sleep, because we want to rest at night knowing that we are at least thinking of doing good for the aam India.

So what has the FM brought in this�the third full Budget? Tax reforms have continued, and for this the government deserves all the credit, even though it is a worthwhile question to ask as to what would have happened if we did not have WTO commitments and if competitors led by China were not breathing fire down our necks? What other tax and/or expenditure reforms have happened in the last three years?

Something all of us support is increased government financing of education expenditures. What one would have wished is greater private participation in schools, especially in poor areas. This would have meant at least a pilot introduction of a school scholarship system for poor students.

A system that would give Rs 2,000 or more to each poor student so that she can choose to attend the school of her parent's choice -- a choice that poor parents are already exercising. Instead, in the grand tradition of tax by stealth in the name of the poor, the cess on education has now been increased to 3 per cent. Why not just raise the tax rates instead?

Such oh so clever proposals (can you imagine anybody protesting for more expenditure for motherhood?) have been a hallmark of the now older finance minister. The fringe benefit tax, introduced two years ago, has now been further tinkerised -- amidst great fanfare, enough to get prominent mention in the Budget speech, we are now told that the government, in its grand munificence, would henceforth exclude "expenditures on free samples as well as expenditure on displays from the scope of the FBT". Gosh, we are all so relived.

The same generosity extends to the touching concern about agriculture. Fertiliser subsidies have increased from Rs 17,000 crore to Rs 23,000 crore, and the government proposes to set up a study group with the fertiliser industry. For clarification, the readers should know that less than 10 per cent of the fertiliser subsidy actually goes to the farmer, and the reason for that is the system of fertiliser pricing for Indian fertiliser forms who receive subsidy on a cost-plus basis. And many such high-cost firms are in the public sector. So the government is going to bring about agriculture reforms by receiving advice from those who have bankrupted the farmer -- but in the name of aam kisan, of course.

What this Budget has brought, in the tradition started in February 2005, is more and more anti-reforms, more and more tinkerisation, more and more back-pedalling while all the time claiming that to move ahead. Cement prices are too high? Why, it must be because of bad industrialists, who are gouging the poor consumer. So the appropriate policy is to bring in price controls, ostensibly via tax incentives.

The prevailing price today is close to Rs 210 per 50 kg bag, and there is an excise tax benefit of Rs 12.5 per bag. So with the benefit, the price can drop to Rs 197 per bag. But to avail of the benefit, the bag has to be sold for less than Rs 190. Maybe I am missing something; else, there is little rationale for this intervention.

As for many other interventions, policies that we thought we had left behind. Not an anniversary to remember.

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