The Business Standard panel debate the merits and demerits of Budget 2011. The debate is moderated by Sanjaya Baru
SANJAYA BARU: Welcome to the discussion on the Union Budget. The initial reaction of the capital market was very enthusiastic but subsequently thereÃ¢Â€Â™s been a certain moderation. The finance minister himself claimed that this was not a Budget speech in which he was coming forward with major initiatives as such but he was making use of the opportunity of an improved growth performance to manage his fisc, reduce the revenue and fiscal deficit, to bring about transparency in tax administration and to initiate steps toward tax reform and introduction of goods and services tax as well as financial sector reforms, and hopefully a greater opening up of the economy with foreign funds flowing into infrastructure and mutual funds. My question to all of you, to begin with, is whether the Budget is below your own expectations or above it and whether it addresses the challenges the finance minister has himself identified.
SHANKAR ACHARYA: It meets my expectations, but not my hopes! He has taken this opportunity towards fiscal consolidation, but I think the numbers are a little optimistic, because if I heard him right, he is talking of something like a 24 per cent increase in gross tax revenues, while the actual tax changes have been very neutral. So, essentially this is going to come from some notion of growth and buoyancy. As we know we are about to complete what has been a fantastic year for nominal GDP growth and, therefore, for tax revenue increases. IÃ¢Â€Â™m not sure you can count on it, and IÃ¢Â€Â™m not even sure if he wants to because pushing for higher growth would involve higher inflation. If you donÃ¢Â€Â™t have that, getting this kind of revenue growth is to my mind optimistic.
He has again put in Rs 40,000 crore on PSU disinvestment. In todayÃ¢Â€Â™s market that doesnÃ¢Â€Â™t look necessarily right. So there are a range of optimistic assumptions there. My worry is that this 4.6 per cent fiscal deficit consolidation is challenging. I think he has lost an opportunity to have a little more insurance by raising the central excise duties, which had come down from 16 to 10 and could have gone back up to, say, 12.
DEEPAK LAL: It is a do-nothing budget. A continuance of the same. It is reminiscent of Brazil and Mexico in the 1970s… People forget Brazil and Mexico were the fastest growing economies in the 1960s Ã¢Â€Â” 8 per cent and so on. And the two sins that no one has addressed - one was, and this was after the first oil crisis, Mexico had a tremendous increase in revenues and they went on a spending spree. When prices turned at the end of 1980, they got into a terrible debt crisis. Brazil was doing extremely well until 1980s and but it suffered very severe trade shocks. India is in a similar way.
A trade shock is equivalent to destruction of certain percentage of GDP. I know one is assuming that trade will rise, but as commodity prices rise there is no way this country can get 9 per cent growth with current policies. Your subsidies, all the social welfare schemes, expanded on the assumption that tax revenues will keep you going, is exactly the mistake they made in Mexico.
Second, and itÃ¢Â€Â™s similar to Brazil… People say what a fantastic industrial sector Ã¢Â€Â” high tech, this and the other. I think this is Brazil in the 1970s. They were exporting these private jets. They were the most efficient producers of a lot of things. But were not able to produce textiles or anything labour-intensive goods. Its labour-intensive sector was not competitive. Now what happens when you get a trade shock, when you have all these huge subsidies, and do nothing about labour reform, you have a very serious employment crisis.
INDIRA RAJARAMAN: Let me speak on Centre-state relations, because on this the budget has been a huge disappointment. The 13th Finance Commission recommended that at the Centre the FRBM-II (Fiscal Responsibility and Budget Management Act) should move to a new federal platform. And the particular feature of this as a follow-on to FRBM-I that we thought was very essential in a federal setting was that the medium term fiscal plan should not be just a big statement of intent Ã¢Â€Â” which is what it is at the moment and is in the current Budget Ã¢Â€Â” but should be a statement of commitment in terms of transfers to the state such that the states know three years into the future exactly what they will get, not just from the statutory transfers which they already know but also in respect of non-statutory transfers. And these non-statutory transfers are assuming great importance in recent years because of the SSA (Sarva Shiksha Abhiyan) and what not Ã¢Â€Â” which are transfers to states variable from year to year at the discretion of the Centre. If we wanted to move to a platform that would characterise a mature federation we thought it was paramount, that states should know exactly what they will be getting, and exactly what they will have to match.
Why this is important is that these non-statutory transfers are in respect of the social sectors and agriculture and so on, but largely social sectors where it is the states that will have to deliver. A recognition of the federal character of this country is important. The fact that states have to be carried along and be told what they can predictably expect in the years to come is very important.
PARTHASARATHY SHOME: I think at the broader macro level, I would say that the way the projections have been made in terms of GDP, itÃ¢Â€Â™s quite optimistic, or rather unexplained. Because, if I look at how 2010-11 turned out, the rate of growth of agriculture was at so high a level that it is completely out of any trend on agricultural growth rates. Services have already grown at 9.6 per cent in 2010-11 and therefore I would say if agriculture went back to its usual trend path, of quite a bit less than 4 per cent, and even a 4 per cent rate of growth is very extraordinary (it comes only after the fifth year of more than average rainfall on a consistent basis), this is a bit of a rosy picture in terms of our future growth. And given the overall growing links to the rest of the international economy and given what is happening to our major trading partners there is a lacuna.
In most economies today including Latin America you have a basis for this kind of analysis, given right to Parliament at the same time. I mean what is the impact assessment, what are the numbers going from now to four/five years hence… we donÃ¢Â€Â™t have any of that and therefore it becomes very difficult to see why across the board in certain expenditure categories you have a certain number which the Finance Minister says he would like to use. ThatÃ¢Â€Â™s fine but it looks more like serendipity to me… so I think it is time, when India as an economy is maturing and integrating very fast, we need the actual basis for these projections very clearly to put faith in them and the fact that we donÃ¢Â€Â™t have them puts me in some kind of a cautionary mode.
I would say in the same vein on the tax revenue front, when I see that projections are based on this kind of GDP growth itÃ¢Â€Â™s likely that we wonÃ¢Â€Â™t probably achieve that… but that is not so important as to say how were the measures derived and if I look at the numbers you get Rs 11,500 crore in direct tax revenue loss and Rs 11,300 crore in indirect tax revenue gain. When I see in a growing economy … an ascending economy … the direct tax measures actually give away Rs 11,500 crore and indirect taxes gather more, it puts me to a bit of a worry… I mean what is the policy basis from the old rationalisation of 1985 that Shankar did and implemented in 1986… we are almost 25 years since then and we are supposed to be rationalising along the way… so when you see this kind of numbers and measures, you worry a bit as to why do we have to rely on indirect taxes even now when there are so many areas in which you can expand the direct tax base. You donÃ¢Â€Â™t need to go on giving incentives and exemptions. In a policy sense broadly, I think that is an area I would like to have seen some numbers given so that we could have had a more intelligent discussion.
Having said all this when I look within the tax area, where there are many Ã¢Â€Â˜badsÃ¢Â€Â™, there are quite a few Ã¢Â€Â˜goodsÃ¢Â€Â™. I think there are some administrative measures and some measures he has introduced, small ones, but they are kind of consistent with the overall tax reform path. So I am kind of happy in that micro area but may be we will have an opportunity to come back to that.
T N NINAN: I want to patent a term Ã¢Â€Â” the Hindu Rate of Reform! In year one, you do what Partho just mentioned… which is you mention it in the speech. In year two, you appoint a committee. In year three you accept the committeeÃ¢Â€Â™s report and say I will bring legislation to Parliament. In year four, you press the pause button and say we will do it next year. In year five you start taking preparatory action. In year six, you actually introduce it and in year seven you rescind it because somebody has protested about the direct tax code or something. Then somewhere between year eight and ten it happens. And you can look at this in terms of labour law, tax reform, you can look at this in terms of oil price decontrol. It seems to me that for an idea to become acceptable and implementable you get somewhere between seven and 10 years before something happens and this Budget is entirely true to form on that.
SHUBHASHISH GANGOPADHYAY: I think as far as the Budget is concerned, just the Budget not the big ticket items, which many Budgets earlier to this have announced and have never followed up… just looking at it as a budgetary exercise I think there are certain measures that have been taken at a micro level like tax administration, increasing the service sector base, then making sure there is no extra distortion in the taxes. I think in all those aspects, this budget is quite remarkable because from this Finance Minister one expects a lot of tinkering, so thatÃ¢Â€Â™s an extremely good signal that he gave out. He stuck to the general direction in which we are moving the tax regime, in particular his mention of the direct tax code (DTC), the goods and services tax (GST) I thought was very good. He actually made a promise, which others did not make, about getting it through and he also mentioned some of the other bills that are pending … that I think is good. There are small things he did… I will mention one or two… one he gave a sop to agriculture but at the same time he said that sop only happens if you repay on time. These small things he did suggests …. as he said at the beginning of the Budget … that he is going to work with the details which can have far reaching impact
Other than that the Budget was a very routine exercise; for me I love routine exercises in the Budget.
INDIRA RAJARAMAN: The Budget has become an occasion for airing a whole number of policy ideas, initiatives and plans of the government but we must not lose sight of the fact that it is the fiscal statement of the government. We should not lose sight of the fact that this was an opportunity for the government to move to the second round of fiscal responsibility. What must not be lost sight of is that fiscal discipline is much more than a matter of targets Ã¢Â€Â” he has once again kept it at the level of targets, for example, we are now at 4.6, we are going to come down to 3, that sounds like a cricket match. The finance commission wanted the government to move beyond ratios to greater disclosure of how these ratios have been arrived at in the annual financial statement.
What kinds of disclosures? We asked specifically that tax expenditure should be clearly stated and not just in the kind of document that we had up to now, but the methodology for working out the tax expenditure should be very clearly stated. You donÃ¢Â€Â™t know the parameters underpinning the Budget , but have to infer them from the 20 per cent tax revenue increase and the 14 per cent nominal growth. We infer that they were using a 1.7 tax buoyancy Ã¢Â€Â” why do they think a 1.7 tax buoyancy was justified? No explanation. We are constantly having to work out the underpinnings of the Budget. But these parameters have to be stated and justified upfront if you want to have a mature statement and an informed discussion.
SHANKAR ACHARYA: One area that is noteworthy and good is that there is no voluntary disclosure of income scheme. The second area that is noteworthy is that another Nandan Nilekani Committee is doing something on cash transfers in the area of fertilisers and kerosene.
T N NINAN: I want to suggest to the group that we are being too critical. If you are looking at three big things that you want in a Budget Ã¢Â€Â” you want fiscal correction, you want social sector expenditure with inclusive growth, and you want reforms. If you look for these three, and if you assume that without one and two you are not going to get the third, you have one and two.
DEEPAK LAL: But not three!
T N NINAN: But you have fiscal correction. You need to reckon with the fact that close to 1 per cent of next yearÃ¢Â€Â™s GDP is revenue this year which will not be available next year Ã¢Â€Â” that is the spectrum sale and all that stuff. So if you were to do a like to like comparison, this yearÃ¢Â€Â™s deficit is actually close 6.3-6.4 and next year is down to 4.6. The way I see it, that is huge fiscal correction.
INDIRA RAJARAMAN: To your three points there is a fourth thing that we want Ã¢Â€Â” and that is transparency.
T N NINAN: You can ask for a lot of things, but IÃ¢Â€Â™m talking here of the three big ticket issues.
INDIRA RAJARAMAN: But the fiscal correction has to be transparently clear and that is not the case. What you say is correct, but we donÃ¢Â€Â™t know where these corrections come from.
PARTHO SHOME: The main issue is that out of your three criteria for the Budget, if you have the first two and you donÃ¢Â€Â™t follow up with the third, you really are not doing anything.
T N NINAN: All IÃ¢Â€Â™m saying is that you are getting two Ã¢Â€Â” this is the most serious fiscal correction that any Budget has done in the last 20 years.
SANJAYA BARU: Thank you. I think the overall view is that more could have been done on reforms and governance issues, but the fiscal effort was a good one, if it can be achieved.