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What to expect on budget day

Omkar Goswami


Two weeks ago I wrote about the fiscal challenges facing Finance Minister P Chidambaram, especially the need to kick-start infrastructure. Last week I discussed about a government that has become a gigantic spending machine — one that spends 7 per cent more than what it earns only on non-plan expenditure. When you read this article, it will be less than a week from the day when Chidambaram will rise to present the fourth Union Budget of his career. What could we expect from him this time around?


No self-respecting economist will ever give you a forecast from which he or she can’t wriggle out. Being no great respecter of oneself, I have always felt that it is the job of a economist to explain things in simple language and to make educated guesses — even at the cost of being proven hopelessly wrong. So, let me choose the path that only fools dare to tread…


I would be very surprised if Chidambaram does not herald a slew of significant policy reforms on 28 February. Among them, I would expect him announcing a sizeable viability funding gap for infrastructure projects; a much larger outlay for financing roads, power, water supply and airports; a dedicated SPV for infrastructure which could use some of our dollar reserves as quasi-equity to leverage market borrowings; possibly some additional tax breaks for creating a market for long-term paper which vital for funding infrastructure; and greater FDI in land, property development, retail and banking. There may be other initiatives as well, especially those concerning reforms of centre-state fiscal relations. By and large, these moves will be welcomed by all. In the long run they would be good for the nation; and in the short they should keep the stock markets happy.


Regarding the fiscal deficit, I am confident that Chidambaram will meet his target of keeping the deficit to 4.4 per cent of nominal GDP. The economy has grown faster than anticipated, which will give a cushion to the denominator. Moreover, thanks to the loan restructuring programme, receipts from the NTPC divestment, cuts in plan expenditure and aggressive revenue collection in the last quarter, Chidambaram may even maintain his deficit targets in absolute terms. This would also please everyone to no end.


Now we come to the more difficult part of guessing Chidambaram’s compulsions. Let me focus on four issues. First, will he cut the peak rate of customs duty by another 5 percentage points? There are industrialists who have steadfastly opposed it for the coming year, on the ground that appreciation of the rupee has already eroded some of the protection. There is also a revenue issue: in the absence of strong import elasticities, customs duty cuts coupled with exchange rate appreciation tend to reduce revenues. My guess is that Chidambaram could do a ‘giveth and taketh’ act, where he could cut the peak rate by 5 points and then impose a developmental or infrastructure cess of an additional 2 per cent. He has done this in the past.


Second, will we see more sops directed at personal income tax payers? I think not.  Chidambaram exchequer can scarce afford more of these. Moreover, he is a great believer in clarity and cleanliness of the tax code. Of course, this  doesn’t mean that he will adopt all the recommendations of the Vijay Kelkar Committee in toto. He will maintain some exemptions, remove a few, and grandfather as many as he can.


Third, will we see any significant reduction in the corporate tax rate? Chidambaram believes that the corporate tax rate should be no greater then the maximum marginal income tax rate. However, I doubt whether revenue compulsions will allow him to cut the rate — especially when the average corporate tax paid at today’s rate is no more then 22 per cent.


Fourth, another VDIS but at 40 per cent taxes? If he can make the Prime Minister agree to that one, he will be a ‘super-cat’. No prediction here.


28 February, therefore, will see a strong reform-oriented budget but it will also be a tough, realistic one. And, frankly speaking, I would rather have an honest, real budget than one that tries to creates dreams.     


Published: Business world, February 2005


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