about us
  areas of expertise
  our projects
  ideas & resources


Index of Articles         Index of Perspectives           Next Article



Reform Bias with Some Tinkering

Omkar Goswami


Before Mr. P. Chidambaram’s budget, there was considerable speculation about what he could do — given the compulsions of the Common Minimum Programme (CMP) of a coalition government. The general consensus among most economists was that he would do three broad things: 

  •   First, that there will be a substantial increase in Plan expenditure, especially in line with the CMP’s objectives of providing more for basic education, primary health, agriculture and employment generation.

  • Second, that we had to be prepared for significant fiscal consolidation through an additional dollop of taxes and, possibly, a substantial reduction in the number of tax exemptions as recommended by the Vijay Kelkar committee’s report on direct taxation.

  • Third, that despite Mr. Chidambaram’s avowed reformist bias, we would do well not to expect any major reforms in this budget — that the real stuff would happen only in February 2005.

The good Member of Parliament from Sivaganga proved some of us totally wrong on the reform front. For instance, I was on record that Mr. Chidambaram would not risk the ire of the Left by increasing the FDI limit on insurance. But he did. To be sure, there is no difference in the legal status of an insurance company if the FDI increases from 26 per cent to 49 per cent. Yet, the signal is obvious — here is a government that is determined to do what it can to attract FDI in core sectors of the economy, and will not brook empty ideological opposition. Add to that the increase in FDI in telecommunications from 49 per cent to 74 per cent, and a rise in individual FII limit on debt funds from $1 billion to $1.75 billion, and we see a clear commitment to both foreign direct and portfolio investment. (Parenthetically, I don’t consider the rise in FDI limit from 40 per cent to 49 per cent in civil aviation as a great reform move. The previous government’s cabinet had already approved 74 per cent.)


As far Plan expenditure goes, there is a huge increase — and all of it along expected lines. At Rs. 145,590 crore, the Plan outlay for 2004-05 is almost 20 per cent higher than the revised estimate for 2003-04. Few, if any, should have any issue with providing 35 kilos of foodgrain for twenty million families below the poverty line; or the food for work programme; or the mid-day meal scheme; or for primary education and basic health. India needs this, and the BJP probably now realises it better than ever before.


However, both Mr. Chidambaram and Prime Minister Manmohan Singh will be the first to admit that we have horrendously inefficient and corruption ridden delivery systems — where less than 10 per cent of the outlays actually go to where they should. So, while much of the extra allocation is laudable, one wonders how much will actually reach ground zero. Equally, if we wait for implementation to improve before increasing allocations, we may as well wait for Godot.


As far as taxes go, there were some along expected lines — the most important one being the 2 per cent cess on all taxes to fund basic health and primary education. Of course, there is an issue about whether this will be ring fenced or disappear in the black hole called the Consolidated Fund of India. But there were two clear surprises. While everyone expected the services tax net to be widened, few thought that Mr. Chidambaram will raise the rate from 8 per cent to 10 per cent. Besides, some of us had felt that he will bell the cat, and tax the transporters once and for all. But clearly, the fear of another nationwide truckers’ strike kept this potentially lucrative and totally under-taxed sector off the radar screen. The other surprise was the turnover tax. Although it is tiny at 0.15 per cent per value of transaction, it may reduce liquidity in an already narrow market. Time will tell.


Bottom line? For a person who had about 40 days to prepare the budget, it was more or less according to expectations. Last time around, Mr. Chidambaram had much more time to fashion his “dream budget”, except that every assumption got unstuck at the end. Lets hope his numbers stick this time around — for the sake of the  gentleman from Sivaganga and for the state of the exchequer.


Published: Business world, July 2004


               Index of Articles         Index of Perspectives           Next Article