High on populism... low on growth

Huge demands, no radical initiative: This might just be a prognosis, but it's a well thought-out one, given a still-fledgling infrastructure, the compulsions of coalition politics, and the fact that every finance minister has focussed on the vast rural poor who remain unaffected by the shenanigans of the Sensex.

By Our Correspondent

One is not going to get quick gains and big breaks in Budget 2006-07. No radical policy initiative is on the cards because the Left is to go to the public for votes, and poll-bound states have to show that they have bargained with the government to keep the attention of their votebanks. This is why finance minister P Chidambaram has to be an anchor, giving incentives and provisions to keep up the growth momentum witnessed in the current fiscal. Then, again, that could well turn out to be a dream.

People and industry, who are expecting a lot out of the budget, and the finance minister, who is singing the same old song about rural India and the masses that finance ministers have been warbling since Independence while formulating the fiscal report card for 2006-07, could both come down with a thud.

If you think that a good budget means tax reliefs and price-dips on day-to-day needs, you might be in for a disappointment. In the finance ministers own words: "(If) a budget, together with other major policy initiatives taken by (the) Government, promotes a growth of say, over 7 or 7.5 or 8 per cent, it can be classified as a good one." Quite.

One needs to boost investment in the year ahead, which the government could not do aggressively in 2005-06 because populism had powered its way into the political centrestage. Any move by the government to appease its populist allies will adversely affect the very foundation and spirit of budget, which aims growth, growth and more growth.

"Growth is a function of investment. If we can boost investment in 2006-07, I am confident growth will be as good as in 2005-06, if not better," says Chidambaram, adding that reform-a word anathema to the government's Communist allies-must continue. India's Gross Domestic Product (GDP) saw an 8.1 per cent growth during the first half of the current fiscal; the overall growth for the full year is likely to be over 7.5 per cent.

A strong dose of fresh investments will be top on the wish list of the finance minister, who, like his predecessors, will attempt to focus on the common person and the vast rural areas whose endemic poverty remains untouched by the trumpeting Sensex. The investment climate might become friendlier. The disinvestment of minority stakes will take place. The selling off of the controversial Navaratna public sector undertakings is not even on the agenda.

Also, there might be no petrifying shocks on inflation or oil prices. Your kitchen budget will be in kept check by LPG and kerosene at subsidised prices. The question is: How long will the state-run oil firms continue to bear the subsidy bill? Good news in the kitchen translates into bad news for the oil companies, whose losses incurred on cooking fuels has piled up to a whopping Rs 18,000 crore.

Alongside, initiatives might be put in place to ensure that the fiscal deficit is scaled down, in keeping with the target set by the Fiscal Responsibility and Budget Management Act (FRBM) 2003. "I am obliged to adhere to the FRBM discipline, both for fiscal and revenue deficit. That's what FRBM says," says Chidambaram, hinting that the government is likely to cut the fiscal deficit by 0.3-4 per cent and the revenue deficit by 0.5-2.2 per cent of the GDP in 2006-07.

For India Inc, the fringe benefit tax (FBT) is here to stay, but simplified—it yielded the government about Rs 1,720 crore as revenue till December 2005. Obviously, Chidambaram rules out its withdrawal. The corporates had been demanding the scrapping of the FBT and instead raising the corporation tax rate by 1-2 per cent to make up for revenue losses, but to no avail. The various chambers of industry are still pushing for the FBT's withdrawal.

As for the tax reforms in the 2005-06 Budget: Chidambaram states that the previously-started move has paid off. Consumption has gone up—the increase in demand for goods was reflected in the fresh capacity being created by ‘India Inc’. Sources in the finance ministry say the government might go in for a dual-rate structure, where some services could be taxed higher: 10 per cent might be the base rate; services such as telecommunications might be taxed at 12.5 per cent. There might be some good news for the manufacturing sector, for which the finance ministry has drawn up a list of tax incentives after having given thought to current economic trends, growth and employment opportunities. Vehicle-makers, textile mills, leather processors, goods manufacturers and the food processing industry might get some tax relief.

Ah, now for everyone's bogeyman: personal income. Expect bigtime disappointment. Industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI), the Confederation of India Industry (CII), The Associated Chambers of Commerce of Industry of India (ASSOCHAM) and the PHD Chamber of Commerce and Industry (PHDCCI) have also submitted their recommendations on similar lines to the finance ministry. In their pre-budget memoranda, they stressed that the manufacturing sector needs to grow in excess of 12 per cent if the GDP is to grow at 8-9 per cent or higher on a sustained basis. The chambers have urged the government to follow the recommendations of the Kelkar Task Force on Direct Taxes and reduce peak rates to below 15 per cent only if accompanied by further progress in internal reforms.

The CII has suggested three specific reforms: first, VAT needs to be implemented in all the states and Union Territories; second, Central Sales Tax should be cut to 2 per cent from April 1, 2006, and be phased out entirely from April 1, 2007—these two reforms will rationalise the structure of indirect taxes, it says; third, fully implement the Electricity Act 2003, without amendments, to help reduce cross subsidies in electricity supplies, for which the brunt of the burden falls on the industry.
In such a complex scenario, coloured by expectations and demands, Chidambaram's success as a budget-maker will be tested by his resoluteness in resisting the temptation to hand out too many goodies. The most vital economic lesson is that the exchequer has to pay for every concession, every subsidy, that the budget offers. Writing and delivering speeches are the easiest of tasks. The finance minister has a difficult task on his hands, given the demands of a yet-fledgling infrastructure and the compulsions of coalition politics.