What the Budget hides

The shooting up of the Sensex must not blind us to the fact that public spending has been going down even as foreign institutional investors rule the roost

By Realpolitik Bureau

Finance minister P Chidambaram calls the growth projection of 8.1 per cent and the Sensex crossing 10,000 points a “heady mix”. He says the Sensex reflects business confidence and the strong fundamentals of the economy, and goes on to advise that "we should remain on the path of tight fiscal control and try to complete projects on time. It is this monetary and fiscal policy that has given us this growth."

This is questionable. There are, indeed, some tax proposals in the 2006-07 Union budget that are welcome, such as the move to bring in 15 new services into the service tax net. The across-the-board rise of 25 per cent on all rates of securities transactions tax, the modernisation of tax administration and the stepped-up tax collection drive, resulting in a 21 per cent increase over 2004-05, are to be similarly lauded. But, on the whole, says the New Delhi-based Centre for Budget and Governance Accountability (CBGA), the tax proposals are disappointing. It says in 2005-06 fiscal, the impact of the tax projections was diluted by corporate taxes. It was only revenue increases from customs levies and service tax that helped register the 21 per cent rise in gross tax revenue between 2004-05 and 2005-06.

But there are perils in placing too great a reliance on indirect, rather than direct, taxes, as it causes the share of the former in the total tax revenue to rise and make the tax structure regressive. Budget-watchers also point to the vast tax revenues that have had to be sacrificed, thanks to a string of exemptions, incentives and tax deductions.

The CBGA also asks how Chidambaram can claim that his “tight fiscal control” resulted in the impressive growth performance in 2005-06. What has actually happened, it explains, is that public spending has seen only inadequate increases, with the transparency level coming down concurrently.

There is more to the Sensex rise than the meets the eye, say observers. They argue that the surge in the Bombay Stock Market Index, far from being a new phenomenon, is for the most part, driven by the growing ranks of foreign institutional investors. And if they hold the whiphand, we have only to thank the numerous liberalisation measures that successive Central governments have uncritically rushed through. Liberalisation of controls over portfolio investments and the transformation of the Indian stock market into a tax haven for speculative trading gains have been crucial factors in the Sensex shooting up. There can be no doubt about international finance capital's mounting clout in recent decades, and itspro-India tilt that come from a host of geopolitical factors. Thus, Chidambaram cannot claim that the impressive economic growth was the direct outcome of the minister’s tight fiscal policies.

The CBGA quotes the Central Statistical Organisation (CSO) as pegging the country's real gross domestic product (GDP) growth rate in 2005-06 at 8.1 per cent, compared to 7.5 per cent in 2004-05. The sectors that are likely to push up the growth rate in 2005-06 are manufacturing (which the CSO expects to grow at 9.4 per cent), trade, hotels, transport and communication (at 11.1 per cent annual growth), and financing, insurance, real estate and business services, which are expected to grow at 9.5 per cent. Thus, on the face of it, overall GDP growth in 2005-06 promises to be substantial.

But the relatively slow growth in the agricultural sector, estimated at 2.3 per cent in 2005-06 (0.7 per cent in 2004-05), indicates that inequality is growing, and employment generation falling.
It is disheartening to note that even after six decades of independent rule, huge deficits in terms of the various developmental indicators stare us in the face. According to the 2001 Census, India's literacy rate stands at 64.48 per cent, and nearly 27 per cent in the villages and 10 per cent in urban areas still lack safe drinking water. Life expectancy at birth stands at 62.5 per 1,000 people and the infant mortality rate per 1,000 live births is as high as 60. The maternal mortality rate, too, is 407 per 100,000 live births.

Yet, despite the high rates of unemployment in rural areas (9.1 per cent) and urban (8.8 per cent), public spending on the social sectors is less than one-third of the expenditure on the defence services.

The United Progressive Alliance government's national common minimum programme (NCMP) had sought to increase public spending on health to at least 2-3 per cent of gross domestic product (GDP) over the next five years. The focus was to have been on primary healthcare, and it planned to introduce health insurance for poor families. Given the abysmal shape of state finances, it's the Centre that would have to bear most of the responsibility. An additional allocation of Rs 5,600 crore (for total public expenditure of 2 per cent of GDP by 2009) to Rs 11,200 crore (for total public expenditure of 3 per cent of GDP by 2009) is needed annually over the next five years to reach the spending promised in the NCMP.

Thus, says the CBGA, “As against the NCMP mandated increase in allocations to health and family welfare to the tune of Rs 5,600 crore, the increased allocations actually lag far behind.” They have risen by some Rs 2,000 crore, which, at least, is a move in the right direction. The government has also done well to lower prices of 10 anti-AIDS and 14 anti-cancer drugs by slashing customs duty to 5 per cent. Duty on certain life-saving drugs, kits and equipment has been brought down to 5 per cent from the existing level of 15 per cent. The drugs will also be exempt from excise and countervailing duties.

In fiscal 2004-05, the government introduced a cess on all Central taxes to finance its promise to universalise quality basic education. The NCMP promised a national cooked nutritious midday meal scheme, funded mainly by the Central government, for primary and secondary schools—an unkept pledge.

As proceeds from this cess, the estimated revenue generated was around Rs 5,010 crore in 2004-05 and Rs 7,490 crore in 2005-06. This financial, it is expected to be Rs 8,746 crore.
This heavy reliance on the education cess raises several questions. Since the cess is imposed on direct as well as indirect taxes, it is a drain on the poor and marginalised sections. Indeed, more than half of the total cess amount collected or projected has, for the past three years, been coming from indirect taxes. The government must identify other sources, too, if its promise to raise public expenditure on education to 6 per cent of GDP is not to be belied.