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Business Commentary/Bibek Debroy

Little to cheer

A I don't understand the deficit figures in this Budget. Consider 'Budget at a Glance'. Using the old GDP (gross domestic product) series and without excluding the transfer of share of net small savings collections (these should not be excluded as they also represent borrowing), the ratio of fiscal deficit to GDP in 1998-99 was 6.5 per cent (revised estimate). The fiscal deficit in 1998-99 was Rs1,03,737 crore. (A crore is 10 million and I will continue to use crore as the Budget uses crore.) Plug this in and you have a GDP figure of Rs15,95,954 crore for 1998-99.

How much will GDP grow in 1999-2000? Finance ministry officials have talked about a 13 per cent nominal GDP growth, with 6.5 to 7 per cent real GDP growth and the rest inflation. I don't believe the Budget has anything to stimulate a 6.5 to 7 per cent real GDP growth. But let's ignore that point for the moment. A 13 per cent nominal growth gives a GDP figure of Rs18,03,428 crore in 1999-2000. The Budget gives a fiscal deficit figure of Rs79,955 crore. If you include small savings, the fiscal deficit is Rs1,04,955 crore. Divide one by the other and you have a fiscal deficit to GDP ratio of 5.8 per cent.

I am sure you have read the finance minister's speech. "Based on the old series of GDP and excluding the payment of the share of small savings" the fiscal deficit to GDP ratio is 4.4 per cent. So don't be misled by that 4.4 per cent, the figure is actually 5.8 per cent on a comparable basis.

Let me remind you that Mr Sinha had a fiscal deficit to GDP ratio of 5.6 per cent in his Budget estimate for 1998-99 and ended up with a revised estimate of 6.5 per cent. The digits got transposed. Does this mean we will end 1999-2000 with a revised estimate of 8.5 per cent?

Jokes apart, the point is that the finance minister is actually budgeting for a higher fiscal deficit than he did last year. Why should we believe him when he says the fiscal deficit to GDP ratio will be 2 per cent in four years?

The Budget does nothing directly for growth or exports. When asked about this on TV chat shows, finance ministry officials said there was an indirect growth stimulus. The government would pre-empt fewer investible resources, ease pressure on interest rates, and thereby stimulate growth.

The Budget estimates for 1999-2000 have an 18.9 per cent higher market borrowing figure than in 1998-99 (Rs57,461 crore compared to Rs48,326 crore). And we ended 1998-99 with a Rs 64,911 crore market-borrowing figure. In 1998-99, we couldn't control expenditure. Despite the Expenditure Commission and some signalling on downsizing government (four secretary-level posts to go), there is no reason why expenditure will be controlled this year either.

The indirect tax revenue projections went haywire last year. They hoped on growth, which didn't materialise. My submission is that the hoping on growth may not materialise this year either.

The finance minister no longer believes in the Laffer Curve. There is an across-the-board deficit surcharge on corporate and household income (above a threshold) of 10 per cent. This may be marginal and may also be temporary, but it is the first time that direct tax rates have gone up since 1991.

In earlier Budgets, the thrust was on widening the base, the one-in-six sort of scheme, which will now be extended to 19 more cities. Ditto for customs.

With the exception of the peak basic customs duty, reduced from 45 to 40 per cent, customs duties have gone up. This is both because of the surcharge of 10 per cent and the unification of customs slabs to five. For example, in the slab of 20-25 per cent, the basic customs duty will be rationalised to 25 per cent. This will also happen in the 30-35 per cent slab. Zero per cent customs duties will be replaced by 5 per cent and 10 per cent duties by 15 per cent.

The average effective rate of duty is bound to go up, although because of reductions at the peak level, one can't quite call the Budget protectionist. Duty hikes will also happen in excise, where there is a rationalisation to 3 slabs of merit (8%), central (16%) and demerit (24%).

Admittedly, there are reductions in some sectors. But overall, including the additional duty on high-speed diesel, the projected revenue from additional taxes is around Rs10,000 crore. This is understandable, given the fiscal pressure. While applauding the rationalisation of excise and customs slabs, my point is that the surcharges on customs and direct taxes were unnecessary. They are also likely to be counter-productive.

One could have handled the fiscal problem and provided a growth stimulus through a genuine PSE (public-sector enterprise) disinvestment, not the kind of cross-holding PSE-to-PSE disinvestment that has been going on. Rs10,000 crore of PSE disinvestment is projected in 1999-2000. In net terms, the figure is less, as around Rs1,700 crore is earmarked for sick PSEs. With genuine PSE disinvestment, one could have got much more.

Several people have awarded the finance minister 6 or 7 out of 10 because of his political compulsions. With constrained maximisation, options become limited. I don't accept this criterion of constrained maximisation. With such a criterion, if constraints are suitably defined, everything becomes impossible.

But let me also mention the good aspects, apart from rationalisation of customs and excise, including removal of discretionary exemptions. Financial assistance to States will be linked to recovery of water charges and land consolidation. Administration of the targeted PDS (public distribution system), the Annapurna scheme and education and employment schemes will be decentralised to panchayats (village councils). If properly implemented, decentralisation and devolution can completely transform public governance.

Thankfully, the central government is not averse to learning from Madhya Pradesh. There will be an Expenditure Commission and some limited downsizing of government. Even four fewer secretary-level positions is something to gloat about. (Is the one abolished in North Block Mr Guruswamy's?) Foreclosure laws will be improved. (Why only the NHB Act, what about the Transfer of Property Act and stamp duties?) There will be more debt recovery and appellate tribunals. The IDRA Act will be reviewed and amended. (Why not scrap it? The only section still relevant is that on small-scale sector reservations.) The MRTP Act will be replaced by a competition policy. There will be a National Foundation for Innovators, a National Bio-reserves Board and a National Statistical Commission. A committee will examine transaction costs for exports. (Hope this report is available before Mr Hegde proposes changes in the exim policy.) There will be a Foreign Investment Implementation Authority, shorter deadlines for Foreign Investment Promotion Board clearances, a technology upgradation fund for textiles and sops for knowledge-based industries and pharmaceuticals. Apart from the 74 per cent automatic approval for FDI in pharmaceuticals, the Drug Price Control Order will be reviewed. There are also schemes on gold deposits, housing and the capital market (dividends from mutual funds). On the capital market, one should mention the provision on reducing tax rates on long-term capital gains.

Note that most of these are intentions and promises. Like disinvestment and opening up insurance in the last Budget? Implementation is a long way off.

By the way, don't get misled by all these new schemes. The central plan outlay is actually less. Take rural development as an example, which includes the Indira Awas Yojana and the National Social Assistance Programme. The Budget estimate in 1998-99 was Rs8,182 crore and in 1999-2000 it is Rs7,843 crore. And there is a big difference between budgetary outlays and central plan outlays. Most ministries and departments have lower central plan outlays. Why does the one for the ministry of external affairs jump from Rs250 crore to Rs400 crore?

Not a damp squib like last year. But damp nonetheless.

Budget 1999-2000

Budget-Day Special

Bibek Debroy

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