Worry With The Numbers
It is difficult to give a comprehensive view of any budget within a few hours of the conclusion of a budget speech. One needs to examine the fine print before really knowing what the proposals actually mean. Consequently, the “shoot from the hip” views of the budget that are published the morning after follow two broad trends. First, there is a large group that praises the effort either gently or, more typically, to high heavens; in this generally belongs most captains of industry, public sector bankers and the like. Second, there is a somewhat smaller lot, who will take a few unsavoury elements of the budget — and all budgets have some of these — to shred it to pieces. In this group belong a small number of journalists, columnist and economists and, of course, politicians from the opposition.
As I desperately type this piece to maintain the deadline, I ask myself three questions: First, are there reasons to believe that Mr. Chidambaram’s budget has a series of critically implausible numbers? Second, does it reflect a balance between reforms and fiscal prudence? And third, does it have some unsavoury surprises — not just for corporate and personal pockets but also for the economy?
Let’s deal with the numbers issue. If you were to read the piece I wrote on 6 July, you will recall that I had conservatively estimated a 10 per cent hike in Plan expenditure. In fact, it is much more. The Plan outlay for 2004-05 is Rs.145,590 crore, which is almost 20 per cent higher than the revised estimate for 2003-04. There should be no problems with this number, given that it funds desirable projects such as providing 35 kilos of foodgrain for twenty million families below the poverty line; the food for work programme; mid-day meals; and primary health and education. Given our multi-layered, inefficient and corrupt delivery systems, it is a different question as to how much of this extra Rs.24,000 crore will actually reach the poor. But that is a much broader issue about state-level administrative reforms, which is outside the ken of the Union Budget.
I have some problems with the estimates of non-plan expenditure which, at Rs.332,239 crore is pegged at Rs.20,509 crore less than the revised estimate of 2003-04. Past experience shows that non-plan expenditure invariably exceeds budget targets — and I wonder whether Mr. Chidambaram is being too optimistic on this front. I would have rested easier had he assumed the same, or a marginally higher, non-plan expenditure.
On the revenue side, there is a seriously bullish assumption about tax collection. The budget estimate of 2004-05 pegs net tax revenue at Rs.233,906 crore — a staggering growth of almost 25 per cent over the revised estimate of 2003-04. Corporation tax revenue is slated to rise even more astronomically — by 40 per cent to Rs.88,436 crore. The fact is that the general growth of tax revenue has been around 17 per cent. Therefore, notwithstanding the two percentage point hike in service tax and the two per cent hike in surcharge by way of the cess, Mr. Chidambaaram is clearly assuming much greater revenue buoyancy than what I believe he should. Of course, the Finance Minister expects to garner more through arrears of taxes, but he hasn’t accounted for these. Personally, I hope he doesn’t get unstuck on his revenue estimates. Because if does, there goes the fiscal and revenue deficit numbers!
So, there are some issues about numbers. Let’s move on to the next issue: Is there a reasonable balance between reforms and fiscal prudence? If you believe the numbers on non-plan expenditure and revenue receipts, there certainly is — for the revenue deficit is slated to reduce from 3.6 per cent of GDP to 2.5 per cent. If the non-plan outlays end up being a bit more and revenues a bit less, he should still do get a lower revenue and fiscal deficit compared to the revised estimates of 2003-04. As far as I am concerned, that is prudence enough.
As far as reforms go, clearly Mr. Chidambaram has moved forward. Many of us would not have believed that he would risk the ire of the Left by increasing the FDI limit on insurance. But he has. 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 commitment to both foreign direct and portfolio investment. The signal is that the government will do all that is needed to get foreign investment, especially in the core sectors.
Finally, are there some unsavoury tax surprises? Everyone expected a cess to finance education and primary health, and the numbers that were bandied about ranged between 2 per cent and 5 per cent. There were two 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. That, to my mind, is not a nasty surprise — although I would have very much liked him to tax the transporters. Clearly, he doesn’t want to deal with another nation-wide strike, and the truckers have escaped yet again. The turnover tax was not that much of surprise — at least one half of my corporate and economic friends expected it.
I would rate this as a decent budget. The reform bias is clearly present. I
am concerned about the numbers regarding non-plan expenditure, overall tax
revenue and corporate tax receipts. And I hope, for the economy’s and for
Mr. Chidambaram’s sake that the numbers actually materialise.
Published: Financial Express, July 2004