Feb 27, 2002 11:52 AM
4089 Views
(Updated Feb 27, 2002 11:52 AM)
The Union Budget is an annual statement that lists out the Income and Expenditure, Assets and Liabilities of the Central Government. The Ministry of Finance, headed by the Finance Minister controls the financial resources of the Government and is responsible for managing them optimally in the positive interests of the country. The Budget prepares the ground and spells out the intentions of the Government with regards to the economic policies to be followed for the following year.
Most of us might not be well-versed with the terminology and other aspects except for those concerned with Income Taxes. I’ll broadly try to cover the positive and negatives of the economy as it stands now and give a thought or two in trying to read the Finance Minister’s mind before the B-Day.
Positives first
Comfortable Balance of Payments (BoP) position – Simply put, this is the net figure of total imports and exports of India for the whole year. If the exports are more than imports, the BoP position is said to be positive and vice versa. According to the Economic Survey released yesterday, exports grew by a miniscule 0.6% for the first 9 months as compared to a hefty 20.8% for the same period during fiscal 2000-01. The net deficit for this year is estimated at around USD 14-15 billion which is very good considering that it was more than 4 times that amount last year. Since the RBI claims to have a foreign exchange reserve kitty in excess of USD 50 billion, this is a comfort factor.
Surplus stock of Foodgrains - Foodgrains output is estimated to rise to 209 million tonnes compared to 196 million tonnes in 2000-01. However, a moot point here is that right now, nearly 60 million tonnes of these stocks are rotting in FCI godowns when millions of people are starving...all thanks to a highly ineffective Public Distribution System (PDS).
Low inflation – Thankfully, Inflation now stands at around 1.13% which is the lowest it has been in a decade. However, real interest rates continue to be rather high in India.
Other factors like a positive growth in the agricultural sector by 5.7% as against –0.2% last year, growth of the services industry by 6.5% as compared to 4.8% last year, etc give ample leeway to the FM to really push revenue collections in a big way.
Negatives
Low Gross Domestic Product (GDP) growth rate – the FM has been harping on a “healthy” growth rate of around 5-5.4% over the last 3-4 years but even that is not due to any special efforts put in by the Govt., but by default. Ideally for an economy of our size and capabilities, we should be targeting a growth rate of not less than 8-9% which however, remains only on paper.
The negatives outgun the positives and it doesn’t make sense for me to list out all of them. Suffice to say that the single largest drawback of the Government has been its inability to deliver the goods when it comes to implementing the economic policies. When the budget was presented last year, industry captains were raving and ranting about it and called it the “Dream Budget”. Taking stock now, hardly 15-20% of what was announced has actually been implemented.
What to expect this year?
Subsidies - These grants by the Government have been the bane of our economy for long. While the intention was to provide essential commodities at affordable rates to those below the poverty line, one can confidently state with the benefit of hindsight and statistical figures that out of every Rs. 100 by way of subsidies, only Rs. 6 (!) reaches those for whom its is meant. Having said that and considering the recent debacle of the BJP in the elections, one can, very reasonably expect an increase of around 10-15% in the subsidies.
Defense Spending – The recent attacks on the Parliament and on the USIS centre at Kolkata have only set a strong warning signal to the Government that we are woefully short of having the capabilities to guard ourselves. Having the kind of aggressive and intimidating neighbour that we do would only foce the FM to increase the allocation here by about 20-25% to around Rs. 60, 000 crores. It really is a pity that such an amount of money cannot be out to more productive use.
Pensions and salaries – inspite of his candid confessions that there is only so much that the Govt. can do when it comes to shoring up its revenue collections, Mr. Sinha stated on many an occasion that the onus would be on controlling non-productive expenditure like salaries and pensions. That, however is easier said than done. More so on account of the spate of disinvestment activities being undertaken right now. I’d expect this to increase by around 10-12% atleast.
Direct Taxes – Under direct taxes, I think the FM would not like to tinker much with the agricultural taxes at the cost of losing the elections coming up shortly. Nor would I expect any change in the Income Tax slabs (atleast negatively) for the simple reason that a rate cut in the small savings rate is widely expected to the tune of 100 basis points. Going into an election year, no FM would like to jeopardize the chances of his own Government by doing two unpopular things, right? On the other hand, I’d expect the surcharge of 2% on corporate tax to go this time and corporates can also hope for a possible reduction in the taxes from the existing 35% to 30%.
Indirect Taxes - The duties on manufactured products could be rationalised more and the rates brought down from a peak of 35% to 30%. As regards the Sales tax, I’d ideally hope for a uniform charge of 12% from the existing 3 slab system of 8%, 12% and 16%, and that would also be in line with Mr. Sinha’s claims of rationalising the tax regime in the country.
Service tax - This is one area which has been untapped in recent years and one may expect the FM to concentrate all his energies on it this time. Many more industries are likely to be brought under the ambit of the services sector and its a foregone conclusion that the tax rate here would be increased from the existing 5% to 10% atleast.
The challenges confronting Mr. Sinha are many in number and daunting in nature. It’s easy to sit back and propose a dream budget but it’s even more difficult to actually do it as the Finance Minister. He has been able to carry forward the reforms process initiated by Dr. Manmohan Singh with a fair degree of success inspite of being constrained by pseudo political pressures. I won’t rule out on Mr. Sinha presenting another dream budget...but it’s more likely that it would remain just that at the end of next year – a “Dream”. I’d rather hope that he comes up with a mediocre budget but is more successful in implementing what he says in it.
I’ll be writing a sequel to this review after the budget is presented tomorrow. Suggestions regarding what exactly to cover in that review are welcome from reader members.
