The inherent structural weaknesses in the economic condition of the nation, as the Budget depicts is the effect of interest-based capitalist method of budgeting on deficit financing system; it has become a vicious circle and it cannot be changed without a drastic structural adjustment, observes DR. WAQUAR ANWAR.
Finance Minister Pranab Mukherjee has admitted in a lighter mood in his budget speech his ranking in the government’s hierarchy by saying, “The number 3 happens to be my lucky number!” As a corollary of this third position, can we say that the budget presented by him is a third class budget or it has meted out third degree treatment to the Indian populace? These would be too harsh, if not unparliamentarily or un-journalistic, comments, despite having elements of truth. A more palatable expression is to refer to the FM as the third umpire of the game of cricket not having much say in the goings of the game, called only when some disputes arise. Pranab Mukherjee has the dubious distinction of being the trouble shooter in political arena. In budgeting too he played the role of the third umpire, the trouble shooter.
STRUCTURAL WEAKNESS OF ECONOMY
There are inherent structural weaknesses in the economic condition of the nation. The weaknesses are increasing with the passage of time and as a result a finance minister may not play any significant role in strengthening the condition. This was true for the current incumbent of the office or the ex-FM Chidambaram and former FMs Jaswant Singh, Yashwant Sinha, Manmohan Singh or Chandrashekhar, or any other gentleman. They may belong to any political thought, leaning to the left or right or maintaining the centrist position, there is not much scope as the structural weakness of the economy is not leaving much scope.
We have presented the precarious economic condition in all our earlier analyses of the budgets. The computations for the current year based on the budget papers are presented in the five tables. These relate to the summary of Consolidated Fund of India, Revenue Receipts, Revenue Disbursement, Capital Receipt and Capital Disbursement, and a computation of Debt Servicing based on these summaries.
In the projected account for the year 2010-11 the debts to be served comprising repayment of instalments of debts and interest thereon is Rs.3008649 crore whereas total earnings of the central government during the year is estimated to be mere Rs.976011 crore. This is only 32.44% of the amount required to serve loan instalments and interest on loans. This figure comes to 29.38% for the Budget 2011-12.
In other words, even if all routine earnings of the government are utilised for payment of loans and interest, it would be sufficient for less than one-third of the liability. The government is left with no alternative other than taking fresh loans to pay off the liability of old loans and interest. Such fresh loans are estimated at Rs.3136408 crore for the year 2010-11 and Rs.3576491 crore for the year 2011-12. These new loans are 95.93% and 95.84% of the debt servicing liabilities for the two years respectively. In other words, more than 95% of new loans are utilised for payment of old loans and interest thereon.
This is in nutshell the effect of interest based capitalist method of budgeting on deficit financing system. It has become a vicious circle and it cannot be changed without a drastic structural adjustment. Similar is the position of most of the developed and developing countries.
TAX REFORMS
The government had earlier announced introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST). It is expected that these reforms will serve the purpose of moderation of rates, simplification of laws and better compliance. The date of introduction of DTC has now been deferred to April 1, 2012. Delay in implementation of DTC is not appreciable.
In regard to GST the delay is understandable as this would require consent of state governments. A major step required for GST is preparation of a standardised classification of goods for nation-wise application in line with classifications available for customs and excise. It is appreciated that the task is daunting but it is submitted it is worth undertaking.
BALANCING ACT
FM has successfully done the balancing act in the budget. Revenue earned from passing on Income Tax benefits amounting to Rs.11500 crore is proposed to be set aside by net revenue gains of Rs.7300 crore relating to customs and central excise and Rs.4000 crore from service tax.
Revenue loss in direct taxes is estimated on account of income tax benefits. Some such provisions are noted hereunder:
Surcharge on Corporate Income Tax for domestic companies reduced from 7.5% to 5%.
Minimum Alternate Tax (MAT) on book profits marginally increased to 18.5% from 18%.
Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology enhanced from 175% to 200%.
The basic exemption limit for general category of individual taxpayers enhanced from Rs.160,000/- to Rs.1,80,000/- . Income tax rate for income above Rs.1.80 lakh and up to Rs.5.00 lakh shall be 10%, that for income above Rs.5.00 lakh and up to Rs.8.00 lakh shall be 20% and for income about Rs.8.00 lakh shall be 30%.
Exemption limit enhanced from Rs.2,40,000/- to Rs.2,50,000/- and qualifying age reduced from 65 years to 60 years for senior citizens.
Higher exemption limit of Rs.5,00,000/- for Very Senior citizens, who are 80 years or above.
Revenue gains in custom and excise are proposed on account of several measures including reduction in number of exemptions in central excise rate structure, enhancement of lower rate of central excise duty from 4 per cent to 5 per cent and optional levy on branded garments or made up converted into a mandatory levy at unified rate of 10 per cent.
Revenue gain in service tax is arranged basically through increasing the tax net by bringing in more services. Such new ‘trapped’ (or taxed) services include hotel accommodation in excess of Rs.1,000 per day and service provided by air conditioned restaurants that have licence to serve liquor, hospitals with 25 or more beds with facility of central air conditioning and life insurance companies in the area of investment.
Service tax continues to be the major source of revenue. The process of broadening its net is continuing and it is expected to further broaden as is evident from the comment of the FM in his budget lecture. He said, “The actual collections of Service Tax do not reflect the full potential of this sector.” So the holy cow has more potential to be milked and so it shall further be milked! There is a fallacy in the whole approach of taxation of service sector. The Constitution of India empowers the government to levy excise duty on select products. But no such constitutional authority exists for taxation of services. Constitutional amendment may be needed for this taxation. Despite that the government is going ahead with the taxation.
DISINVESTMENT
Another source of fund the government is relying is disinvestment. A sum of Rs.22144 crore is estimated for the current year (2010-11) from the sale of government’s ownership in public sector undertakings. The FM says, “The Government’s programme to broadbase the ownership of Central Public Sector Undertakings (CPSUs) has received an overwhelming response. The six public issues of CPSUs in the current financial year have attracted around 50 lakh retail investors. A higher than anticipated realisation in non-tax revenues has led us to reschedule some of the divestment issues planned for the current year. I intend to maintain the momentum on disinvestment in 2011-12 by raising Rs.40,000 crore.”
He has, however, assured that the government is committed to retain 51% ownership and management control of the CPSUs. The whole idea of earning by selling wealth accumulated by earlier generation is obnoxious. Budgeting based on windfall earnings is no planning. One should maintain the wealth for more bad times.
FOREIGN INSTITUTIONAL INVESTORS
Foreign Institutional Investors (FIIs) till now were not allowed to invest in equity market. They had to come through Mutual Fund route. Now that embargo is being lifted. Further, FII limit for investment in corporate bonds by companies in infrastructure sector is being raised by an additional limit of US Dollar 20 billion taking the limit to US Dollar 25 billion. This will raise the total limit available to the FIIs for investment in corporate bonds to US Dollar 40 billion. FIIs would also be permitted to invest in unlisted bonds. These measures are increasing the role of foreign investors in the Indian market.
Initially such moves were resisted. Now the voices of dissent are far and few between. A majority of politicians have either agreed or accepted these things as fait accompli. And the media is silent. We are opening up or giving up. Principles of non-alignment, sovereignty, self respect and sustainable development are being risked at the altar of open market economics and short term gains. This road is fraught with perils.