R.K. Radhakrishnan

Budget preparation in the face of many constraints

CHENNAI: The Finance Department is near the end of a very tough exercise of drawing up the coming year's budget boxed in by many constraints and not too many avenues to raise resources.

The main constraints include finding allocation for the new schemes announced in the Dravida Munnetra Kazhagam manifesto and also support all the existing schemes. All this has to be done within the goals set by the Medium Term Fiscal Responsibility Act.

The `big ticket items' that need substantial allocations include the write off of agricultural loans, the colour television scheme, the supply of rice at Rs. 2 a kg, the supply of free power to farmers and also its proposed extension to weavers, development of waste lands, establishment of welfare boards for various categories of workers, the decision to convert consolidated pay for some categories of staff into regular pay and also the decision to fill up all the existing vacancies in government.

Tamil Nadu is among States having the highest tax to GSDP (Gross State Domestic Product) ratio and hence, the taxes could not be raised any further. In this scenario, the Finance Ministry has the unenviable task of making available needed resources to each sector without cutting down substantially elsewhere.

There are a few positives for the State: It is well on course to keep its fiscal targets. The reduction of fiscal deficit to below three per cent of the GSDP has been achieved ahead of the targeted 2007-08. A buoyant economy, above-normal revenue receipts and the sound fiscal situation would go a long way to help.

With the State still not deciding on joining the Value Added Taxation regime, many industry bodies are worried over the impact on their competitiveness and expansion plans. Continuance on a non-VAT regime would mean that these companies would also lose their export competitiveness since they cannot claim any relief for the value addition. There is also the fear of industries deciding to opt out of Tamil Nadu if they did not derive the taxation benefit after value addition. Officials and industry bodies point out that many of the industries came to the State because of its lobbying power. It is also spoken of as an emerging automotive hub. All the spadework done to achieve so much would be wasted if a decision on VAT was not taken.

There is another danger too: According to officials, only if the State joined the VAT regime the first year it was introduced was it eligible for 100 per cent relief if there was a loss in revenue. The State stood to lose if the decision was put off since in the second year, tax loss compensation was only to the tune of 75 per cent.

Though growth in revenues this year was more than that of the average VAT-State, industry bodies and officials say that this might not last if the State continued to remain outside the VAT purview.