There was a lot of apprehension before budget day regarding what the Union finance minister will do to reduce the deficit. Will he roll back the tax concessions implemented a couple of years ago as part of a fiscal stimulus package? Will he announce populist social sector spending in view of the major state polls coming up this year? Will he be too timid and not take any bold steps to ensure that the stalled reforms process is galvanised into action? Well, as it turns out, the FM took everyone by surprise.
First, I do not know why everyone wants the budget speech to announce the reforms plan of the government. If one were to go by past speeches which were hailed as reformist budgets, most reforms promised in them are yet to be carried out. This is evident from the plethora of bills that have been gathering dust for quite some time. One can say Pranab babu has been honest and not claimed to do things he is not in complete control of. He can control the deficit and promise allocations to the more important government functions. Luckily, he has focused on maintaining growth to control deficit and increased allocations to education and health.
One of the big issues in the pre-budget discussions was that of governance and the inefficiencies and leakages taking place in social sector spending. This is one of those things in which the finance ministry can do very little. Things like education and health are state subjects even though the central government is the main funder. People who want the finance minister to ensure that these monies are properly spent show a certain lack of awareness of the federal structure of the country and a certain degree of insensitivity to the objectives of these expenditures. For instance, is it really possible for the Centre to tell the poor in any state that it is going to turn off the expenditure tap for that state because the state administration has been inefficient in spending the money? After all, the persons who will be affected the most by the Centre holding the states responsible are the poor themselves.
And it is in this area that the FM has been very bold and announced that cash transfer schemes will be put in place to give direct subsidies for lpg, kerosene and fertilisers to people living below the poverty line. This is bold because it will disappoint the corrupt who were causing the leakages; it will also stop giving subsidies to those who do not need them. A subsidy that keeps prices low does not discriminate between rich and poor users. A direct cash transfer to poor consumers will keep the costs low for them while everyone else pays the market price, as they should. More importantly, it does not distort consumption choices by the rich. For instance, if the subsidy to diesel goes away, the rich will have to reconsider their purchases of fuel-guzzling SUVs currently powered by subsidised diesel, whose economic cost is higher than that of petrol!
The other governance area in which the budget gets high points is tax administration. First, the FM has committed to introduce, in this session of Parliament, a direct tax code bill and a constitutional amendment bill essential for the introduction of the goods and services tax (GST). He has also indicated that there is a greater degree of convergence among the states in how GST is to be implemented. Both these are very good news. And the minister has signalled his commitment by rationalising taxes wherever he can in a way that will make the transition to GST that much easier.
Also commendable is the budget’s move towards broadening the electronic payment system for taxes. Furthermore, small details, like allowing exporters and importers to pay taxes based on self-assessments and being subjected to random audits will have a far-reaching impact on the transaction costs of doing business in India. Similarly, creating an electronic platform for those who earn salary only and have their taxes deducted at source will free up the administration to focus on issues in tax evasion more effectively. In other words, for once, an FM has done well and has stayed away from playing to the gallery.
The writer is research director, India Development Foundation
