about us
  areas of expertise
  our projects
  ideas & resources


               Index of Articles         Index of Perspectives           Next Article



Chidambaram’s Challenges

Omkar Goswami


Two days from now, Palaniappan Chidambaram will rise to present the third Union Budget of his career, and the first in his second innings as the Finance Minister. At this point of time, he and his mandarins ought to have frozen every element of the budget. Today, he may at best be giving his final editorial flourishes to the budget speech before sending it to the basement of the North Block for printing under heavy security.


While Mr. Chidambaram will be the first to admit that India’s economy is in substantially better shape than 1997-98, his fiscal choices may have become more limited than when he presented his so-called “dream budget” in February 1997. Let me try to explain why with some numbers.


It is a fact that in order to reduce poverty and ensure greater economic opportunities, India needs to maintain a growth rate of over 7 per cent for the next decade and a half. Nobody can deny this. It is also a reality that such growth is not possible without significantly higher investment in infrastructure — be it power, railways, roads, ports, irrigation, agricultural extension, or better social, health and educational facilities. Superimpose some key elements of the Common Minimum Programme (CMP) — such as raising public spending in education and health respectively to least 6 per cent and 2 per cent  of GDP — and we are looking at a government that is determined to increase the country’s overall public spending.


Therefore, we should expect a bias in favour of higher plan expenditure. According to Mr. Jaswant Singh’s interim budget of February 2004, the revised estimate of plan expenditure for 2003-04 was Rs.121,507 crore. I would expect this number to be at least 10 per cent higher for 2004-05 — or something in the neighbourhood of Rs.135,000 crore to Rs.140,000 crore.


Household accounting says that if you are spending an extra Rs.15,000-20,000 crore on some heads, then you should spend that much less on inessentials. Unfortunately, Mr. Chidambaram has no room for manoeuvre on this front. Decades of fiscal profligacy have come to roost, and there is little that the Finance Minister can do to substantially slash interest payments. I would be surprised if the expenditure on account of interest outgo is significantly less than Rs.130,000 crore. Equally, given the compulsions of this coalition government, I don’t expect the expenditure on subsidies to be cut by even a paisa. Indeed, I would guess that subsidies will increase by 5 per cent to around Rs.47,500 crore.


But that’s not all as far as non-plan expenditures go. Salaries and pensions will continue on their upward path. It will be difficult to cut defence expenditure, which would be in the region of Rs.66,000-Rs.68,000 crore. And, given the nature of coalition politics, Mr. Chidambaram would find it extremely tough to reduce the non-plan grants to states and union territories, which would probably be around Rs.20,000-Rs.22,000 crore.


The long and short of it is that, in all probability, the Union’s total expenditure would range between Rs.475,000 crore and Rs.480,000 crore.


Let’s move on to the revenue side. The CMP abhors privatisation. Therefore, Mr. Chidambaram’s receipts from disinvestment in 2004-05 should be quite a bit less than the Rs.16,000 crore projected by his predecessor. With less than nine months left in this fiscal year, I would generously peg this at around Rs.6,000 crore. If there were no changes in the tax rates, then tax revenue would grow only as fast as nominal GDP. Assuming a growth of about 13 per cent (7 per cent real GDP and 6 per cent inflation), we would be looking at a gross tax revenue of about Rs.290,000 crore. After subtracting the share of the states, the centre’s net tax revenue for 2004-05 would be around Rs.220,000 crore.


Thus, if there were no new taxes, and assuming the same non-tax revenue as projected by Mr. Jaswant Singh (of Rs.70,750 crore), the total revenue receipt of the central government for 2004-05 would be around Rs.290,000 crore. Add to this loan recoveries of Rs.14,000 crore and disinvestment income of Rs.6,000 crore, and the amount totals Rs.310,000 crore. Compare that with a total expenditure of Rs.475,000 crore to Rs.480,000, and you are probably looking at a fiscal deficit between Rs.165,000 crore and Rs.170,000 crore.


That’s would be a pretty serious fiscal deficit —  anywhere between 25 per cent and 29 per cent higher than the revised deficit for 2003-04. Since nominal GDP is not expected to grow faster than 13 per cent, arithmetic tells us that, without greater revenue receipts, the fiscal deficit will constitute a larger share of GDP. The kind of expenditure that the CMP desires with ‘business as usual’ revenue could raise the fiscal deficit to above 5.5 per cent of GDP.


There lies the rub. Neither Mr. Chidambaram nor Prime Minister Manmohan Singh will tolerate a higher fiscal deficit ratio. Hence, I am willing to bet that a substantial portion of the time spent by the two during the run-up to this budget has focused on how to raise additional revenues to finance the extra expenditure. Raising tax revenues without creating adverse signals is easier said than done. For instance, if Mr. Chidambaram were to implement all the recommendations of Vijay Kelkar’s report on direct taxes and eliminated all the key tax sops, he would raise corporate tax revenues from the current average of 22 per cent of PBT to nearer 30 per cent. But that would mean hell from the corporate sector, with its attendant consequences. Similarly, if he were to cut down on the tax breaks available to individual tax payers, he can raise more money — but at the risk of facing an immensely irate tax paying middle class.


In this juggling of taxes, I clearly foresee a significant widening of the services tax net; I also see the levy of some kind of cess to finance education and health; and I’d be surprised if there were a slew of sops — the fiscal freebies that make industrialists and stock brokers cavort with glee. On his own, Mr. Chidambaram may have been tempted to take some fiscal risks. But his fiscally hard-nosed Prime Minister will not. And this will be the good doctor’s budget as it will the advocate’s. So, let’s prepare for some austerity with a few good cheers thrown in. If the cheers dominate, treat that as good kismet. 


Published: Financial Express, July 2004


               Index of Articles         Index of Perspectives           Next Article