Editorial of July 25, 1991 Editorial

Sparing the poor

DR. MANMOHAN SINGH’S BUDGET represents a major effort at adjustment, displaying at the same time a sensitivity to the national interest and social concerns. Given the magnitude of the crisis the seeds of which were sown by the previous Congress (I) regimes and which was accentuated by the ineffectual handling by the National Front and the Janata Dal (S) Governments, his task was indeed the most unenviable. On the one hand, with unsustainable fiscal imbalances and with foreign reserves down to just two weeks’ requirements for imports, drastic measures were called for and the foreign lending institutions including the International Monetary Fund and the World Bank were watching. On the other, with the Government itself precariously placed and dependent on Opposition groups for long term stability even if not for immediate survival, its capacity to take hard decisions was in question.

In the circumstances, the broad philosophy that Dr. Manmohan Singh outlined was that large scale fiscal adjustment was needed but the poor should be protected from the burden of adjustment. Few Finance Ministers carry their announced philosophy through fully, but the latest budget is one without any major philosophical contradiction. The very poor have been spared and even given marginal reliefs as in the case of the cut in the price of kerosene. The burden is primarily on the corporate sector and on the rich and the middle class. For one thing, the budget marks a major shift in revenue raising from indirect to direct taxes and should gladden the advocates of equity. While in the sphere of indirect taxes the net effect of the proposals for the Centre is negative, an additional Rs. 2,213 crores is to be raised from direct taxes. For another, even within indirect taxes, the “luxury” items including cars, air-conditioners and consumer electronics are to bear a significantly heavier burden. Even in the sphere of expenditure, while producers’ subsidies including export subsidies and fertilizer subsidies have been virtually done away with, the food subsidy which benefits the poorer consumers directly has been marginally increased.

The magnitude of the adjustment is reflected in the substantial reduction of the budget deficit from Rs. 10,772 crores in 1990-91 to Rs. 7,719 crores, a level that for the first time in recent years seems reasonable if only the Government does not allow it to enlarge during the course of the financial year. With the Government itself at last getting down to some drastic pruning of its expenditure, the taxpayers have much less room to complain about the Rs. 2,617 crores of additional taxation. This is indeed the first time that the often talked about effort of Finance Ministers to cut expenditure is reflected in a substantial measure in the budgetary figures.

In the sphere of direct taxes, the personal income tax and the wealth tax rates have been left untouched which is no small mercy. On the other hand, there is a minor concession on long term capital gains calculated to give a boost to the share markets. Dealing with black money is a politically sensitive issue for any concession to the unscrupulous even while the honest taxpayer has been suffering the heavy imposts seems unconscionable on the face of it. Yet revenue imperatives have prompted the Finance Minister to come up with two new schemes. The first is the plan to draw black money for slum clearance and low cost housing and the social purpose is expected to remove any stigma that might attach to this scheme that would legitimise black money. However, unless the enforcement is tightened and the risks of evasion turn out to be much higher than at present, it remains to be seen if the holders of black money would be willing to suffer the 40 per cent levy the scheme entails and bring the money into the tax net. This is also true of the amnesty scheme for income tax evaders and the softer settlement provisions. In the area of corporate taxation, the Finance Minister has been somewhat harsher than he needed to have been perhaps in the expectation that the liberalised trade and industrial policies would mitigate the impact. The increase of five percentage points in the corporate tax rates even while retaining the surcharge at 15 per cent is a major burden. So too is the cut in the depreciation rate from 33.3 per cent which is considered too liberal, to 25 per cent. The changes have upset the calculations of those who had planned on the basis of the earlier rates and would have a dampening effect.

In indirect taxes, cigarettes have, as always, come in for heavy imposts. So have motor cars even as two wheelers of 50 to 70 cc have been given a concession. Dr. Manmohan Singh has declared himself against mindless consumerism of the affluent Western type and colour television sets, air-conditioners, video recorders and refrigerators have been hit harder. The “luxury” goods sector catering to the middle class and the affluent in the urban areas has been a dynamic and high growth area and it remains to be seen how much more it can take without retarding industrial growth as a whole.

While previous budgets have talked of the need to rationalise the current extraordinarily high rates of customs duties, Dr. Singh has now made a beginning, even if a small beginning, in that direction. The cut in the highest rate of import duty from 300 to 150 per cent was long overdue and was indeed rendered imperative by the devaluation of the rupee and the rising premium on REPs which have pushed up import costs. The longstanding complaint of industry that very high import duties on capital equipment have pushed up project costs has at last been heeded even if in a token measure.

On the expenditure side, there are two surprise elements. The first is the increase in defence expenditure by Rs. 600 crores over the level of 1990-91. With the security situation not causing any particular concern, there was indeed no compelling reason for the increase even if the defence budget is made up in large part of salaries and routine expenditure. Yet there was perhaps the apprehension that any cut in this area would be seen as a compromise of the national interest at the command of the international lending institutions. A cheery aspect of the scenario in the last two years is that even with huge fiscal imbalances and severe foreign exchange crises, the economy has grown at the rate of about 5 per cent a year. Dr. Manmohan Singh’s claim that the fiscal adjustment would not affect the growth impulses in the economy seems valid for the most part except in two respects. The first is the increase in fertilizer prices which might dampen agricultural production even with an assurance of higher procurement prices for the farmers. The second is the substantial new burden on the corporate sector which is bound to hit industrial growth that has been at a fairly vigorous level of over 8 per cent in the last two years. One would hope that the positive impulses from the Government’s other policy initiatives would more than compensate for these retarding effects. Only then would the adjustment effort have been purposeful beyond the accounting exercise of striking a fiscal balance.

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