Events : Economic, Development & Social Issues

Discussions on Union Budget

Held on 3rd March 2006

The Bangalore International Centre (BIC) organised an interactive discussion on the Union Budget 2006/07 on 3 March 2006. The discussion was moderated by Prof S L Rao, former Chairman, Central Electricity Regulatory Commission, and former Director-General, National Council of Applied Economic Research. It brought together three distinguished experts who spoke about different aspects of the budget – Mr B K Bhattacharya, former Chief Secretary, Government of Karnataka; Dr Vinod Vyasulu, Centre for Budget and Policy Studies; and Mr Rostow Ravanan, Head-Finance, Mind Tree Consulting.

Mr P R Dasgupta, Director, BIC, welcomed all the participants, and spoke about the significance of the budget in India – a fiscal exercise of considerable magnitude and a major media event.

Prof Rao kicked off the discussions by laying the context for this year’s budget. He called it a Chidambaram budget with a difference, in that it was lacking in the bold initiatives usually associated with his earlier budgets. Possible reasons cited for a “don’t-rock-the-boat budget” were the political reality of a fragile coalition, forthcoming elections in four major states – West Bengal, Kerala, Tamil Nadu and Uttar Pradesh – and also perhaps, an element of caution, given that the economy is currently doing well. The panellists also made the point that this budget had no major crisis to respond to, and hence, aimed more for consolidation and stability.

However, with three years of steady growth and two years remaining for the elections, all speakers felt that the budget had tremendous scope to initiate far-reaching measures, but failed to do so. Some of the missed opportunities in major areas are discussed below.

Inadequate investment in physical and social infrastructure

There is a lot of euphoria about India’s 8% rate of growth and the rapid rise in the Sensex, but we do not know about the extent of poverty reduction in the country due to lack of poverty estimates after 1999/2000. The unemployment rate has increased as reported in the Economic Survey 2005/06, and half the children under one year are malnourished as per UNICEF figures. What is needed is solid investment in physical and social infrastructure. However, physical infrastructure like roads and bridges has been largely neglected in this budget with either marginal or negative growth in expenditure. There is also no mention in the budget about the mechanism to facilitate infrastructure financing. Prof Rao suggested the utilisation of Provident Fund or foreign exchange reserves for financing much-need infrastructure projects, pointing out these may also turn out to be remunerative investments.

Mr Ravanan made the point that investments in education and health care are essential to capitalise on our demographic advantage of a young population. Mr Bhattacharya strongly felt that the new schemes for rural development and employment were not really new. The Bharat Nirman programme, which is claimed to be a paradigm shift for use of resources for rural growth, is merely an umbrella for allocating resources for existing schemes. Similarly, the National Rural Employment Guarantee Act subsumes the existing scheme of Sampoorna Grameen Rozgar Yojana in 200 identified districts. Nevertheless, it was pointed out that even if new schemes are merely revamped versions of existing ones, there is usually additional funding made available, and also existing funds are more appropriately channelised. Whether the money will be spent efficiently remains a major concern.

Sectoral reforms: Agriculture and power neglected

There are several opportunities in the agriculture sector that have not been tapped in this budget. The focus of investments in the agriculture sector has been on irrigation, but not enough has been done for warehousing and cold storage. While farm credit has been made more easily available, it needs to be based on productivity.

According to Prof Rao, the single factor that could hold back India is neglect of the power sector. The budget could have given incentives for new investments or privatisation. Nevertheless the redefinition of captive coal mining will encourage greater investment in coal and will lead to growth of the power sector which has been faced with coal shortage.

On petroleum product pricing, though there is reference to the Rangarajan Committee Report, no moves were announced particularly on rationalisation of subsidies.

Unutilized opportunities for taxation reform

In the year gone by there was a marginal increase in tax revenue and a decline in non-tax revenues as there was no disinvestment. If exemptions on corporate tax, customs duty, excise duty, etc are removed, taxes can be brought down by 33% while remaining revenue neutral.

Mr Bhattacharya quoted Mr Shankar Acharya in calling 2005 the year of 3 bad taxes: the fringe benefit tax (FBT), the securities transaction tax, and the cash withdrawal tax. The FBT is iniquitous, complex to implement, and its constitutional validity is questionable. The present budget did little to correct or do away with these “bad taxes”. On the positive side, the budget has taken concrete steps towards a single goods and services tax (GST).

A lot more could have been done towards increasing the tax base. The removal of the 1/6 norm for filing tax returns was debated. One proposal was that filing of returns by all graduates be made mandatory. A suggestion by Mr Vyasulu about considering an inheritance tax (or death duty) evoked much audience reaction.

Corporate perspective: focus on IT

Mr Ravanan appreciated the government’s initiatives on e-governance which facilitate transparency, access to information, and administrative simplification. He also welcomed the modification in the fringe benefit tax as the relief on superannuation fund helps provide social security.

On the other hand, not enough is being done to promote education and entrepreneurship given India’s potential as a knowledge economy. The 8% custom duty on software is a retrograde move, as it will hit end-consumers (e.g. of educational software and applications) and affect penetration of technology (combined with excise duty on domestically manufactured computers).

Spending efficiency and outcome budgeting

An important gap pointed out in the Budget was that it made no mention of efficiency in expenditure, be it on defence or on subsidies in petroleum sector, agriculture etc. Nothing was said either about the implications of the forthcoming Pay Commission recommendations.

Mr Bhattacharya gave various examples of lacunae in service delivery: states with high urban poverty include Karnataka, Maharashtra, Tamil Nadu, and even Gujarat; the mathematics performance of Karnataka students is poorer than even that of Bihar; 51% of children who contracted polio in 2003 were administered four or more doses of the polio vaccine; in the Sarva Shiksha Abhiyan, the emphasis seems to be on construction of school buildings and toilets rather than on students and teachers.

All the panellists emphasised the need for mechanisms to ensure that we spend more efficiently. Mr Ravanan pointed out that the delay by state government in tabling statements, and auditing of accounts implies at least a 3-year lag between actual and estimated expenses. Prof Rao suggested the possibility of quarter-to-quarter budgeting.

Moreover, instead of merely reporting allocations to government schemes, the Finance Minister should report on the impact of these schemes, highlighting the importance of outcome budgeting. While Prof Vyasulu pointed out that the responsibility for spending lies with the states or the relevant ministries, Prof Rao stressed the need to build capacity in local authorities to receive, spend and manage money.

Tempering the euphoria

Mr Bhattacharya questioned the sustainability of India’s 8% rate of growth and cautioned that we should temper our euphoria because the US economy may crash or there may be other unanticipated external shocks that could adversely affect India. Prof Rao pointed out that in addition to external shocks, the possibility of internal political turmoil can also not be entirely ruled out. Dr Vyasulu was of the opinion that the budget missed out on so many opportunities because we do not have clarity about desired goals e.g. in power, transport, etc. For the budget to be more than a media event, it must start reporting outcomes against laid down targets so that there is clarity about what the people get out of every rupee spent by the government.