Economy Watch

Budget 2010-11: The true picture

In a Budget speech which was tiresome in parts and often filled with trivia that was almost meant to distract, Finance Minister Pranab Mukherjee claimed that he was delivering a growth-oriented but inclusive budget that was within the bounds of fiscal prudence. If true, this does signal the emergence of a new form of economic governance. The Economic Survey had earlier argued that the time had come for a shift to an “enabling” rather than an interventionist state. That shift was supposed to deliver non-intrusive governance that only seeks to help those who cannot manage to do well for themselves. In the process it was supposed to ensure fiscal consolidation through a reduction in the fiscal deficit.

The difficulty of course is that in a country where as much as 40-50 per cent of the population is poor, properly financing even this “minimalist” role for the state needs a substantial sum of money. If in addition the government, given its fiscal conservatism, wants to exit its fiscal stimulus and reduce its fiscal deficit, a substantial increase in revenues is necessary. There are, therefore, two questions that arise. To start with, how far has the Finance Minister gone in sustaining expenditures and pushing his objective of being more inclusive? And, to the extent he has, how has he mobilised the requisite resources and what are the resulting implications?

If we examine total expenditure in the budget, it has risen by just 8.5 per cent in nominal terms. Adjusting for inflation at current rates this amounts to a stagnation of real expenditures. But given the fact that financial year 2009-10 was one in which expenditures did rise noticeably because of the implementation of the Pay Commission’s recommendations and because of the fiscal stimulus in response to the slowdown in growth, this stagnation in real expenditures cannot be dismissed as wholly inadequate. Moreover, if we examine the central plan outlay and aggregate expenditures in two social sector areas — education and health — which the Finance Minister has chosen to draw attention to in his speech, we find that they are indeed projected to rise significantly. Gross expenditure on Literacy and School Education is slated to rise from Rs. 39,553 crore to Rs. 47,773 crore and on Higher Education from Rs. 14,376 crore to Rs. 16,690 crore. In addition, the central plan outlay on Health and Family Welfare is projected to rise from Rs. 18,283 crore to Rs. 22,300 crore. But, all this is partly the result of a reallocation of expenditures. Thus, non-plan expenditures on all social services are slated to fall from Rs. 35,146 crore to Rs. 29,483 crore or more than Rs. 5,500 crore. To boot, a planned cut in subsidies on food and fertilizer, which would impact on the poor and sectors like agriculture that house a majority of the poor, is reflected in the budgetary figures.

These trends aside, it is true that the budget provides for an increase in aggregate expenditures in nominal terms. This rise is accompanied by some direct tax concessions in the form of substantially “broadened” income slabs for different levels of income taxation and a reduction in the surcharge on corporate taxes. Yet, the budget expects a reduction in the revenue deficit from 5.3 to 4 per cent of GDP and the fiscal deficit from 6.7 to 5.5 per cent of GDP. How has the Finance Minister ensured this transition? To start with, even though direct tax concessions are expected to result in a decline in Income Tax receipts of around Rs. 4,400 crore between the revised estimated for 2009-10 and the budget estimates for 2010-11, Corporation Taxes are projected to rise by as much as Rs. 46,255 crore. The latter occurs despite the fact that the surcharge on corporate taxes is to be reduced from 10 to 7.5 per cent. There are only two ways in which the substantial increase in Corporation taxes can be explained. One is an assumption that the increase in the Minimum Alternate Tax to be paid by corporations from 15 to 18 per cent would substantially increase revenues. The other is that corporate profits would display strong buoyancy in the aftermath of the recovery.

But even this Corporation Tax bonanza is inadequate to explain the Finance Minister’s “achievements”. There are three other features of the budget that are of relevance. First, through an “across-the-board” hike in non-oil excise duties, adjustments in customs duties, higher duties on oil and petroleum products and expanded taxes on services, the Finance Minister expects to garner an additional Rs. 70,000 crore of indirect tax revenue. This is a reversal of the practice of relying less on indirect and more on direct taxes in recent years. Indirect taxes are known to be inflationary in nature, hurting the poor in the process. So this trend goes contrary to the claim that the budget aims to be more inclusive. In fact, in the run up to the budget, with the evidence pointing to a recovery in GDP growth, the close to 20 per cent inflation in food prices had emerged as the principal problem to be addressed. The decision to rely on inflationary indirect taxes (including on universal intermediates like oil products that would raise costs and prices across the board), which would push up prices further, points to the fact that inclusiveness is less of an objective than the Economic Survey and the Budget proclaim. This perception is supported by the fact that in a context of food price inflation the budget seeks to curtail food and fertilizer subsidies.

A second noteworthy feature of the budget is the unusual fact that an item called “Other Non-tax Revenue” is slated to rise from Rs. 36,845 crore to Rs. 74,571 crore between the revised estimates for 2009-10 and the budget estimates for 2010-11. This huge revenue windfall is to come largely from receipts from ‘Other Communication Services’, which consist of license fees from telecom operators and receipts on account of spectrum usage charges. Receipts under this head were budgeted for Rs. 48,335 crore in 2009-10, but yielded only Rs. 13,795 crore. The budget for 2010-11 again provides for Rs. 49,780 crore from this head of “revenue”, suggesting that what is being calculated is the receipts from the auction of spectrum. If this is the case, it would be wrong to treat this as a revenue receipt. If it is not, the revenue and fiscal deficits would go up substantially.

Finally, the budget provides for “Miscellaneous capital receipts” of Rs. 40,000 crore in 2010-11, which refer to receipts from disinvestment and privatisation. This head is reported to have yielded Rs. 26,000 crore in 2009-10. If not for this sale of public wealth, the borrowing required to finance the government’s expenditures would have been much more, necessitating higher commitments for interest and amortisation payments in future. That would have made it difficult for the Finance Minister to claim that he was not merely delivering inclusive growth, but doing so while remaining fiscally “prudent”.

In sum, it does appear that a combination of inflationary taxation, significant revenue optimism and a modicum of window dressing have helped craft a budget that appears growth oriented, partially inclusive and fiscally prudent. We need not wait till the revised estimates come next year to conclude that this is by no means the true picture.

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Printable version | Nov 28, 2021 11:04:01 PM |

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