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When the Cupboard is Bare

Omkar Goswami


Consider a huge, unwieldy company whose non-executive Chairperson sends a large laundry list of expenditure items and expects that money will be spent on these heads — something that the management is in no position to refuse. There is a much respected CEO who knows what is good for the company and wants it to become a financially strong, globally respected growth engine, but is forced to appease undisciplined and recalcitrant outside stakeholders, often to the detriment of the company’s health. Then there are incompetent SBU heads, who are where they are by dint of stakeholder support, and not because of administrative capabilities. Some of them are more worried about their family enterprises rather than what is good for the business unit that they lead. Amidst all this a hapless CFO who has discovered that revenues are abysmally insufficient to cover the exploding demand for higher expenditure, and who suffers because he is supposed to produce magic time and time again.


We are talking of the economic management of India, and the CFO is Finance Minister P. Chidambaram, who must be agonising over how to accelerate reforms and simultaneously garner significantly higher revenues for meeting an ever growing list of non-productive government expenditure.


The fiscal situation is grim, and Chidambaram knows it better than anyone else. According the latest data, the collection of net tax revenue to the Central government for the first nine months of 2004-05 was Rs.141,246 crore. That happens to be almost 40 per cent short of the budget estimate for the year — which the Ministry of Finance has to collect in the last three months of the year. In such a situation, one can be hardly surprised to see excise ordinances such as the recent one regarding ITC Limited, which overturned a Supreme Court judgement with retrospective effect to enable the government to collect additional revenue.


Matters are just as bad regarding non-tax revenue. The budget estimate for 2004-05 was Rs.75,416 crore, against which the government collected only Rs.47,247 crore in April-December 2004. Thus, a shortfall of over 37 per cent is expected to be made good in the last quarter of the financial year. Consequently, the overall shortfall in revenue receipts has been 39 per cent which, somehow, Chidambaram must collect in the last three months of the fiscal year.


In a backdrop of a revenue shortfall, the government has not been able to control non-plan expenditure. For the first nine months of 2004-05, non-plan spending was Rs.245,567 crore, or 74 per cent of the budget estimate — which is in line with the linear trend. To somehow curtail government spending, the Finance Ministry has resorted to the time honoured practice of severely squeezing Plan expenditure. The amount spent on this head during the first three quarters has been Rs.81,224 crore, or 66 per cent of the budgeted amount. It’s a fair bet that by the end of the year, cuts in plan spending will be the main  drivers of expenditure control. That’s bad on two counts: it not only shows the state’s inability to cut non-productive expenditure, but also by pruning plan outlays, it cuts its nose to spite the face.  


In this milieu, we have a government whose coalition partners universally believe that greater expenditure is the only path to political nirvana. The National Advisory Council wants an allocation of Rs.19,000 crore in 2005-06 for the Employment Guarantee Scheme. The Left wants government to create a kitty of Rs.50,000 crore for financing schemes professed by the Common Minimum Programme (CMP). In order to appease the Left, the government has already paid the steep price of increasing the Employee Provident Fund rate from 8.5 per cent to 9.5 per cent with retrospective effect from 2003-04. You can bet your life’s savings that the 9.5 per cent rate will now remain fixed for the entire tenure of this government and that, sooner rather than later, this additional financial hole will have to be funded by the budget. There seems to be no end to expenditure demands of the Left and other UPA partners; and the only way they propose to raise the requisite revenues is to raise customs duties, raise corporate taxes, levy new cesses and do everything possible to turn the nation back to the glory days of the 1970s.


What, then, can one expect the good Finance Minister to do on 28 February, the day when the financial newspaper reading public expects a second dream budget? Here’s what I think. First, being what he is, Chidambaram will unveil a set of sound reform measures, most of which will have neither revenue nor expenditure implications. Second, he will significantly raise outlays under various CMP heads but link them with contributions from state governments, with the hope and prayer that much of the expenditure won’t happen because the states won’t have the matching funds. Third, he will give no tax relief worth the name as far as personal income taxes go — not because he doesn’t want to but because he can’t afford them. Fourth, exactly for the same reason, there will be no significant corporate tax relief. Fifth, expect some new cesses to crop up, especially on stuff like cigarettes and pan masala. Sixth, expect many more activities to fall under the services tax net. Seventh, there will be some adroit financial sophistry to show that the  fiscal and revenue deficits are in line — or even lower — than what was budgeted. Eighth, there will be some scheme to mop up undeclared income. Ninth, there will be some very hard talk on income tax compliance and a big squeeze on the dividend incomes of profitable PSUs. And tenth, expect half a dozen couplets from sundry poets all over the land. 


It will be a realistic budget in a tough fiscal environment. It won’t be a dream budget that is being expected. If that makes me a party pooper, so be it. Better to be hardnosed and happy, than over-expectant and disappointed.


Published: The Economic Times, February 2005


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