The Hindu : Image & substance in budget 2003-04

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Tuesday, Mar 04, 2003

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Image & substance in budget 2003-04

By C. Rammanohar Reddy

This budget marks the restoration of practices that Manmohan Singh worked to end in the early 1990s.

ONE OF Jaswant Singh's more memorable contributions to the terminology of political economy discourse is that we should not look to the gross domestic product but the "gross contentment product". What we do have in Mr. Jaswant Singh's first budget, to borrow from the Finance Minister's own language, are proposals that will only enhance the "short-term satisfaction product". There is very little that will give long-term effect to that other motto of Mr. Jaswant Singh of "putting food in the stomachs of the hungry and more money in the wallets of the taxpayer". The budget certainly does a little bit in both areas. But poverty alleviation and a higher growth of personal incomes on a sustained basis require, in the first instance, a revival of private and public investment. The budget only offers the illusion of imparting a new momentum to investment and growth. In the end, it turns out to be a budget that has won applause only because it has provided a cleverly packaged set of handouts and illusions.

For the salaried, whose concerns are widely articulated in the media and all public discussions, there appears to be a lot in the budget — the abolition of the surcharge on incomes of up to Rs. 5 lakhs, a modest increase in the standard deduction and tax rebates for children's education. But it is not so much what the Finance Minister has done as what he did not do on taxes. A class of taxpayers which was rattled by the Kelkar proposals could not have asked for more from Mr. Jaswant Singh than to abandon the no exemptions-low tax rates approach, however valid the task force recommendations may have been. Since perceptions matter as much reality, the decision on the Kelkar proposals more than neutralises the impact of a higher service tax, the higher cess on diesel and petrol and even the cuts in interest rates on small savings and bank savings deposits.

For infrastructure, the entire momentum is to come from a grand package of investment of Rs. 60,000 crores (to be spent over an unspecified period) on roads, rail, ports and convention centres. But on closer reading it is all too clear that this is hope masquerading as concrete investment plans. The "public-private partnership" that is to fuel this investment is still on paper. The manner in which this new approach will work has not yet been tried out on any significant scale in any area. The details of the "partnership" have not been spelt out. The public-private partnerships would involve private and public outlays, so if the Government had really thought through this initiative it would have made some provision in the budget for the public sector's share of the investment. But there is none. Indeed, in some areas such as roads, Central Government capital expenditure (other than on the ongoing Golden Quadrilateral project) is budgeted to actually decline in 2003-04. It is obvious that the budget passes off the investment proposals of the public-private partnership as something certain when in actual fact it is just a vaguely worded promise that sounds attractive. The only impetus to infrastructure investment will come then from the budgeted Plan capital expenditure. This unfortunately will go up in 2003-04 by no more than 6.5 per cent, which will do no more than neutralise the effect of inflation. The Central Plan for 2003-04 is budgeted for a slightly larger (8 per cent) growth. But we must bear in mind that in 2002-03, there was a 5 per cent shortfall in the Central Plan outlay because the public sector was not able to come up with the required internal resources. So what we may end up with next year is not a qualitative leap in infrastructure investment but at best a stagnancy in real outlays.

For the rural poor, who Mr. Jaswant Singh said were first in his priority, the budget has even less to offer. The decision to expand the Antyodaya Anna Yojana is a positive decision, since the programme has from all field accounts made a positive contribution to nutritional intake among the rural indigent. It is questionable if an additional Rs. 507 crores is sufficient to take coverage from 15 per cent to 25 per cent of the households living below the poverty line in rural India. But that is not the main point. Allocations for the rural employment programme, the Sampoorna Grameen Rozgar Yojana, are to come down in 2003-04 by nearly a third. This will hardly "put food in the stomachs of the hungry". The Government's argument will be that the huge 50 per cent jump in spending on the SGRY in 2002-03, in the form of larger allocations from Government food stocks, was occasioned by the drought and there should be no need to maintain spending at the same level in 2003-04. But that is indefensible since, one, rural under-employment does not disappear in a normal monsoon year and, two, food stocks at 48 million tonnes are still twice the buffer levels and are sufficient for meeting nutrition and rural employment programmes. Yet, the budget is happy to confine itself to expanding the AAY and simultaneously slashing funding for rural employment programmes. This is yet another example of the budget selling an illusion while covering up the detail.

These are three examples of the budget selling an image more than substance. This is not to deny that the Finance Minister has refused to swear by the shibboleth of fiscal orthodoxy. But this has not expressed itself in giving a Government/state-sponsored boost to investment. It only shows in the more realistic projections of revenue growth and maintenance of aggregate (as against sector-specific) expenditure. The couple of initiatives to ease the debt burden of the States and the Centre should also be acknowledged. But one fundamental defect in the budget is that it brings back the era of the budget pandering to individual sectors with suitably-tailored packages of tax cuts and concessions. Tax incentives are not by definition avoidable. But they are when they are not implemented as part of a larger tax package which has a definite economic rationale. This year the sectoral concessions are ad hoc and reflect the clout each industry has with the NDA Government. This was what happened in the 1980s when particular industrial groups (especially in textiles and petrochemicals) used their lobbying power to tinker with the excise and customs duty structure. The Government at that time acted as an instrument of lobbies and the 2003-04 budget marks the restoration of practices that Manmohan Singh worked to end in the early 1990s. Even the hapless Yashwant Sinha did not play with indirect tax rates the way Mr. Jaswant Singh has. A package for textiles, a package for gems and jewellery and restoration of zero excise duties on some products are examples of this new ad hoc dispensation. So much for even the basics of tax reform.

The basic philosophy of the budget is to please the electorate and lobbies with give-aways and hope that these concessions will drive growth. The first objective may or may not be fulfilled at the polls next year, the second will certainly not be. Growth cannot be built on give-aways. For instance, the so-called "dream budget" of 1997-98 did not deliver more rapid growth. If it did economic growth would not have decelerated in the period 1998-99 to 2002-03. Handouts only provide short-term gratification, they eventually turn out to be short-sighted actions.

GDP growth during the past five years (1998-99 to 2002-03), co-terminus incidentally with the tenure of the earlier BJP-led and present NDA Governments, has averaged 5.4 per cent a year, substantially lower than the average of 6.6 per cent recorded in the previous five years (1993-94 to 1997-98). Yet, it is strange that the budget only offers a mirage to pull the economy out of a slow growth phase.

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