These Taxing Times

This is not an apocryphal story. A talented, Harvard-educated Indian lawyer sat down to try and understand the Indian budget for some work he was doing for a foreign government. As he pored over the numbers, he realised to his dismay that the figures told a very stark story. "There’s absolutely no manoeuvrability in the Indian budget. How does one shift these massive interest payments, pensions, defence expenditure and so on that make up non-plan expenditure? The finance minister is completely powerless in terms of making the budget," he exclaims.

This experience is by no means singular. It can be shared by any Indian citizen with some ability to read figures-all previous budgets are available in print and on the Net. It’s in this backdrop that the hype surrounding all budgets, especially Union Budget 2000-2001 which is being called the Millennium Budget in many circles, should be viewed. One is tempted to agree with Shubhashis Gangopadhyay, professor at the Indian Statistical Institute, that "budgets are essentially an annual tax-transfer mechanism-deciding how much money should be taken away from or given to which sections of people. Reforms, on the other hand, are something that the government should engage in throughout the year. I sincerely hope, therefore, that they are kept out of the budget."

Yet, the common man’s enhanced interest in the budget is understandable. Even in corporate circles, hearts beat faster, lobbying increases for a sneak preview and company secretaries spend sleepless nights. The long history of high income-taxes, steep, discretionary import tariffs and ever-changing excise duties on everyday goods, administered by a permit-raj, is difficult to forget. As a result, the common worries are still there: whether post-budget, prices will rise, taxes will go up, things will become more difficult to produce/manufacture/export/import?

Tough for whom?

And this year is particularly worrying as finance minister Yashwant Sinha has himself indicated that it will be a "tough" budget. Ironically, all available information indicates that it’ll be singularly tough for Sinha to eke out even a respectable gap in his books-new borrowing, fiscal deficit in economists’ jargon, will be close to 6 per cent of the GDP this fiscal, instead of the 4 per cent target. That’s another Rs 40,000 crore at last year’s GDP estimates. Now, how’s he going to show what he’s done with it? Second, and more important, how will it affect the new budget-more taxes, higher rate of taxation or less state expenditure?

When the going gets tough, the tough gets going. But with inflation at 3 per cent, both agriculture and industrial factor prices down, imports flowing in at a steady stream, manufacturing sector growing at 7.5 per cent and a foreign exchange reserve of $34 billion, it will take some imagination to call the going tough. Says Ashok Gulati, Nabard chair professor, ieg: "Sinha’s in the most comfortable position enjoyed by any finance minister in recent years. Look at 1999-2000. Without any effort, the economy has got close to 7 per cent growth. The same can happen this year too, despite a bad harvest. So, where’s the need to take harsh measures?"

Precisely the same argument is used by another expert to argue that this is the best time for Sinha to boldly push pending reforms. Says Bibek Debroy, director, rgf: "I’d say import duties should go down further, though that’s least likely to happen, except in infotech. Even the surcharges and special duties will stay. There should be, and will be, price hikes in LPG, kerosene, diesel but that’ll be out of the budget. Fertiliser subsidies should be junked, but that won’t happen. Service taxes should be extended, and they probably will be. Most important, the government should single-mindedly push privatisation and implement user charges-the UP power board strike has proved that Indians are desperately seeking reform in poorly-run public services."

Still no chop and change!

All the experts Outlook spoke to feel that the government should just have a two-pronged agenda-cut expenditure on subsidies and salaries and privatise the public sector. Yet, almost all rule out subsidy-cut because of political pressures. Says P. Chidambaram, former finance minister: "The scope for expenditure cut is small because of interest payments, defence expenditure (which will increase) and huge salary bills. The FM needs to drastically cut subsidies, especially fertiliser, but I doubt how much of that would be possible (in view of protests from allies)." Adds Omkar Goswami, consultant, CII: "The first thing the government needs to do is to get a political mandate and cut fertiliser subsidy drastically."

Together, fertiliser and power subsidies now account for about 2 per cent of the GDP. Says Gulati: "Eighty per cent of the fertiliser industry is wiped out, so whom are you subsidising? As for power, it’s a myth that farmers enjoy subsidy. Delhi has 40 per cent transmission and distribution losses, where are the farmers here? Subsidisation of power is subsidisation of theft." The imponderable here then is where or who is the subsidy lobby?

Much of the non-manoeuvrability on the expenditure front is in fact the government’s own creation. Forget defence for the moment-after all, the FM has to make some allowances for patriotism-what about pensions and salaries? This is an area where even anti-reform Leftist parties are vocal. Says D. Raja, secretary, CPI: "As it happens with a coalition government, despite its claim to reduce a lot of departments, the opposite has happened-the number of ministries has gone up." Echoes M.K. Pandhe, president, citu: "Today, fiscal deficit is close to 6 per cent and remains unattended because the government does not want to implement the recommendations of the Fifth Pay Commission which suggested slashing the number of ministries."

Senior economist at ncaer, Subir Gokarn, considers the inability to downsize itself as one of the biggest failures of a government that has otherwise firmly established its credibility on both domestic and external sector reforms. Says he: "The bigger the establishment, the more difficult it’s for reformers. There are two ways of cutting costs: the axe method and the scalpel method. The former puts an overall cap on each ministry’s expenditure, affecting all programmes, good and bad alike. The latter allows each ministry to prioritise its programmes for their social cost-effectiveness, and work out an effective expenditure plan. So far, all efforts have been of the axe type and not much is going to change this year."

As for the remaining Atlas’ burden in non-plan expenditure-interest payments-there’s a country-wide consensus that the easiest, and fastest, way to reduce the interest burden and avoid the debt trap yawning ahead is to retire a significant portion of the domestic debt. And the kind of money that is needed to achieve that can be acquired only from massive privatisation.

Please call it privatisation

But what do you expect from a government that gets busy with privatisation only to meet the revenue target at the end of the year? What do you expect of a government that still calls a sell-off a "disinvestment"? Imagine Modern Food "disinvested" with hll? It means the government is yet to adjust itself in the new environment of not owning a PSU any more. Says Goswami: "The government must go the whole hog on privatisation and ensure it is not called disinvestment. It must raise around Rs 35,000-40,000 crore. A sell-off of mtnl alone can raise the amount. It should utilise Rs 15,000 crore for amortising debt, Rs 7,000 crore for the social security net and the rest for an infrastructure fund."

A neat plan, but smoother on paper than on the ground. Roadblocks abound, especially in the form of employees of these PSUS on the block-Modern, for instance, will soon lose 1,300 staff and no amount of strikes will work with hll, the magic they do with the PSUS. Fumes Raja: "The way the government is privatising PSUS is amazing. Even PSUS making healthy profits are being sold off." Adds corporate analyst Abhay Yograj: "If the government thinks privatisation will be easy, it’s badly mistaken. Globally, there are countless examples where governments have backtracked on privatisation. Recently, the French government delayed disinvestment in some insurance companies because of stiff opposition."

And of course, don’t forget the internal roadblocks. The privatisation of Modern Food took over two years simply because the food processing minister refused to part with the only PSU in his domain. The privatisation of sail has been indefinitely postponed because it’s the biggest PSU involving a few ministries and, therefore, many beneficiaries. Says Isher Ahluwalia, director, icrier: "There has to be a mechanism under which the PSUS to be privatised are removed from the control of the administrative ministry and put under the department of privatisation (in this case Arun Jaitley) until the process is complete." Gokarn suggests instead of being sold as companies, PSUS be auctioned off in terms of individual assets. The proceeds can be used in part to retire employees and departments.

Indeed, privatisation can become the triple-edged sword in the hands of a "tough" government to achieve expenditure control, revenue targets and bridge fiscal gap all in one go. A much better option than raising tax or import tariffs, which experience proves, rise in volumes only when rates are cut and the base widened. As more items come under the import net, which will happen with quantitative restrictions going, the buoyancy in customs will give Sinha the much-desired revenue growth. A favour the FM can still do is to announce the list of 700 items in one go in the budget, and allow corporates to make their plans, without waiting for the April Exim Policy.

Says Chidambaram: "The main tasks before the FM is to accelerate to 10-12 per cent growth through lower interest rates, higher exports and more infrastructure projects. As for fiscal deficit, we’ll be happy if he can cut it to 5 per cent over the next three years." If Sinha’s third budget can pave the way for a never-before ever-dreamt-of growth this time, he’ll never have to worry about a tough budget in future. That’s incentive enough, isn’t it, Mr Sinha?