Conservatism is an approach of life whereby one preserves some traditions and abides by certain conventions. Such a conformist may be following any age-old practice or merely following in the footsteps of a not-too-long visionary. In the case of the Indian budget all the practitioners belonging to both the conglomerates – UPA and NPA – since Dr. Manmohan Singh presented his first budget in early nineties, have treaded the path beaten by him. The present Finance Minister (FM) is no exception.
Conservatism emerges from two attitudes: either commitments or mere easygoing like the person sliding down needing no effort on his part. It is difficult to diagnose our case. Good sense demands that we should assume commitment as the symptom. It is credible that for almost two decades the economy is being moved in one direction with single-minded zeal in complete disregard of comments, warnings and dissenting views because committed persons generally do not look sideways and ignore feedbacks.
Traditions have both good and bad elements. We are finding a similar situation in the case of Budget 2010-11.
Following quotes from the budget speech of the Finance Minister shows the inflexibility of the Government on the issues on which credible dissenting materials are available.
ON DISINVESTMENT: “While presenting the Budget for 2009-10, I invited people to participate in Government’s disinvestment programme to share in the wealth and prosperity of the Central Public Sector Undertakings.” It may be noted that disinvestment has been referred to as “People’s ownership of PSUs” although what happens is that public control over these “Public Sector Units” is being transferred to the private hands. One may wryly comment that these private entities too are part of the public at large!
ON FDI: “Foreign Direct Investment (FDI) inflows during the year have been steady in spite of the decline in global capital flows… Government also intends to make the FDI policy user-friendly by consolidating all prior regulations and guidelines into one comprehensive document. This would enhance clarity and predictability of our FDI policy to foreign investors.”
ON SEZ: “The SEZ have attracted significant flows of domestic and foreign investments… Government is committed to ensuring continued growth of SEZ, to draw investments and boost export and employment.”
CONCEPTUALISATION
The FM has conceptualised budget formation in the initial paragraphs of the budget speech describing the philosophy behind the exercise. He says, “With development and economic reforms, the focus of economic activity has shifted towards the non-governmental actors, bringing into sharper focus the role of Government as an enabler…. An enabling Government does not try to deliver directly to the citizens everything that they need. Instead it creates an enabling ethos so that individual enterprise and creativity can flourish. Government concentrates on supporting and delivering services to the disadvantaged sections of the society.”
In other words, the government need not deliver directly to the citizens. It should rather assist non-government actors (NGAs) to deliver. So these NGAs have assumed the role of the intermediaries between the government and its citizens. The Government needs to service the NGAs. That would suffice! These are new thoughts quite apart from the welfare role of the government we had been till date understanding. We need to be educated about these (by the government and not by these intermediaries, the NGAs)!!
RATIONALISATION
The nearly two decades’ old stated object of rationalisation continues as announced in following cases.
Income tax rates have been further rationalised. Much is being said about the ‘benefits’ bestowed upon the salaried persons. The correct perspective is rationalisation and not the benefit. The new proposed income tax slab is good for those earning more than Rs.250,000, and much more to those drawing above Rs. 500,000.00. For the marginal and middle-of-the-order wage-earner it has no message. A simple extension of the exemption limit, say from 160,000 to 200,000 would have been done if benefit as such was intended.
The announcement that Direct Tax Code will become operative from the financial year 2011-12 is another step of rationalisation. The FM said in the speech, “I am confident that the Government will be in a position to implement the Direct Tax Code from April 1, 2011.”
Experimentations are being done to make IT Return Forms user-friendly and like earlier years new such forms are on the card. The FM informed that the income tax department is now ready to notify SARAL-II form for individual salaried taxpayers for the coming assessment year. Such experimentations from year to year in the name of making the forms user-friendly (or saral) are self defeating as the users (the tax assesses) get confused. Over the last few years it has become to issue new set of forms. In fact these days the year of assessment is printed in bold letters on the face of the forms and the form of one year becomes redundant for the subsequent years. Excess of everything is bad, even good intentioned moves.
As regards Goods and Services Tax (GST) the FM is, understandably, less emphatic. “It will be my earnest endeavour to introduce GST along with the DTC in April, 2011.” Here consent and involvement of State Governments too are required and the Central Government cannot finalise this on its own.
The announcement that work on Unique Identification Authorisation of India (UIDAI) is progressing smoothly and the first set of the codes will become operative from the next year is also a step in the same direction of standardisation and rationalisation.
However, the much talked about rationalisation has been lost track in the case of excise duty rates. In the case of service tax the FM warned that he had this option which has not been utilised in view of the proposed standardised rate of GST. He said, “To bridge this gap, I had the option to raise the rate of service tax to 12 per cent… I am not resorting to this option … to bring about a convergence in the rates of tax on goods and services.” The complex task before an FM in meeting both the ends may be understood and appreciated.
Like his predecessors, Pranab Mukherjee is also eying service sector and the potential to tax it along with commodities are being explored and the scope being widened with every budget. Some new services have again been subjected to service tax. The FM has not kept this intention under wraps and has plainly stated, “The service sector contributes nearly 60 per cent of the GDP. The service tax to GDP ratio however, is only around 1 per cent. This sector thus, has significant potential to augment revenue.”
MICRO FINANCE
While describing Micro, Small and Medium Enterprises (MSMEs) the FM has informed that these contribute 45 per cent of the manufactured output and 40 per cent of our exports. They provide employment for about 6 crore persons through 2.6 crore enterprises. A task force has been constituted and funds earmarked to ensure their development. Further the FM informed that the programme for linking Self Help Groups (SHGs) with the banking system has emerged as the major micro-finance initiative in the country. Funds have been earmarked for this area too. Microfinance encompasses micro deposit, micro credit, micro insurance and micro enterprise. A comprehensive plan for their development is the need of the hour. Particularly with regard to provision of micro credit the solution of linkage between SHGs and banks is no solution in the present scenario where actual cost of finance to these micro enterprises is high. A portion of the funds earmarked for these purposes should be utilised for interest-free provision of finance.
The mode of interest-free finance should be given at least a trial. A beginning was done in this area in the Budget 2007-08 when Chidambaram, the then FM, proposed interest free loan in three cases: for institutions set up for training farmers; for preparation of project reports under public-private partnership (PPP); and for seed money to upgrade select IITs. Surprisingly, the concept of interest-free finance has not been tried thereafter.
SMOKING
Our FM says, “Since I quit smoking many years ago, I would urge others to also follow suit, as smoking is injurious to health.” In the same lighter vein we would enquire what about alcoholism. The FM may be a teetotaller (we do not know, simply a guess work)! That is more injurious, we understand. We increase duties in these products with the logic that their consumption will be discouraged and thereby healthier atmosphere will usher in. But when it comes to computation, we compute the increase in revenue because of such increase in duties. There is a fallacy involved!
PRAISEWORTHY
Some announcements are worth praising. Two such things are mentioned here with regard to income tax. Last year a vital change in the definition of charitable activities was brought in whereby the advancement of any other object of general public utility could not be considered “charitable purpose” if it involved carrying on of any activity in the nature of trade, commerce or business. The FM received representations from many organisations seeking some relaxation in this restriction. Accordingly it is now proposed that this restriction would not be applicable if the receipts from such activities do not exceed Rs.10 lakh in the year. This is a welcome move. However, further relaxation is called for in the case of existing charitable trusts and institutions so that the activity they were engaged in before this amendment is not hit.
Another welcome proposal relates to limits of tax audit requirements and tax deduction at source (TDS). Now tax audit will be required for turnover exceeding rupees sixty lakhs, instead of earlier rupees forty lakhs, in the case of business and rupees fifteen lakhs, instead of earlier rupees ten lakhs. Similarly, limit for deduction of tax at source have been enhanced in the case of payment to contractors and rent.
LOOT AND GRAB
The dissenting voice should be noted by the government and society. The destiny of the nation should not be decided (sealed, rather) merely on the basis of numbers in the parliament at a given time. The opinion expressed by P. Sainath in his article in The Hindu is one such appraisal of the budget which we should not ignore. He has sarcastically remarked that this budget is not for farmers but for the corporate farmers and agribusiness. The subsidies provided for the corporate sectors exceed Rs.50,000 crore comprising revenue foregone in excise duty — Rs. 1,70,765 crore and Customs duty — Rs.2,49,021 crore besides the Rs.80,000 crore in direct write-offs. “This comes to Rs. 57 crore every single hour on average — almost a crore a minute. Beating last year’s Rs. 30 crore an hour by more than 70 per cent. (See Tables 5 and 12 of the “Statement of Revenue Foregone” section of the budget.)
P. Sainath may appear harsh but he has merits. He says, “Consider that this loot-and-grab sortie has been on for two decades now. It means that in direct tax freebies alone the corporate sector has had the equivalent of some 15 ‘farm loan waivers’ since 1991.”
DEBT ANALYSIS
We have analysed in the table above the total debt servicing required and the potential of the Indian economy to repay the same. The analysis is based on the figures presented in the Consolidated Fund of India in the budget documents. The position revealed is very alarming. Total fund inflow generated both from revenue and capital accounts is grossly insufficient in comparison with the debt servicing required. Fund inflow in the estimates of the year 2009-10 shall be merely 21.27% of the amount required to pay off interest and the instalments of debt due during the year. This shall be 23.61% as per the Budget 2010-11.
As the generations of funds in the estimated and budgeted years are grossly insufficient to pay off interest and instalments of debts the economy shall be compelled to take new debt. The analysis of figures in the table shows that almost all of the new debts will be required to pay off the interest and instalments of debts. In the estimated year 2009-10 the percentage of new debts to be utilised for debt servicing shall be 97.09% while it has been budgeted to be 95.54% in the year 2010-11.
The precarious situation as above is the hallmark of a capitalist economy where interest is payable on debts. The same situation is prevailing in almost all developed, developing and under-developed countries. However, Indian economy has an inherent strength as compared to the USA and African countries! Unlike them, our debts are mostly from internal sources. Our external debt is much lower than the internal debt.
TABLE SHOWING DEBT SERVICING REQUIRED
Rs. crore
Particulars | Estimate 2009-10 | Budget 2010-11 |
Interest payment | 221384 | 251664 |
Disbursment of debts –Internal | 3245925 | 3370393 |
– External | 11230 | 12271 |
Total debt servicing required | 3478539 | 3634328 |
Internal debt receipt | 3555057 | 3769445 |
External debt receipt | 27766 | 34735 |
Total debt receipt | 3582823 | 3804180 |
Debt servicing as a percentage of debt receipt | 97.09% | 95.54% |
Total revenue receipt | 707659 | 811459 |
Total non-debt capital receipt | 32107 | 46624 |
Total non-debt receipt | 739766 | 858083 |
Total non-debt receipt as a percentage of debt servicing | 21.27% | 23.61% |