Any budget that comes sandwiched between a 7.75-8 per cent annual growth forecast and the visit of George Bush can be confusing. What else can it be? An unknown missile or a weapon of mass euphoria? A nightmare or a dream? Strongly pro-reforms or full of election giveaways? This year, it may be all of the above.
Most CEOs think so too, according to the Outlook-CNBC TV 18 pre-budget poll with a sample size of over 100 biz honchos. They predict that Budget 2006 will be a mixed bag. It will be pro-reforms—fortunately, the economy has reached a stage where no government can opt for anti-reform policies. But Union finance minister P. Chidambaram will keep the state elections in mind; so there will be sops for agriculture, infrastructure, social sector and the common man. As for taxes, most CEOs feel they’ll see a kinder PC who’ll reduce customs, streamline excise, retain service tax level and unveil a clever tax amensty scheme. But he won’t scrap either the cash transaction tax or the fringe benefit tax.
In comparison, the Outlook-CNBC TV 18 Common Man’s poll, with a sample size of over 1,100 people in 11 cities, found that while urban Indians feel that prices of cooking gas, petrol and diesel will go up, they are confused as to whether personal income tax rates will be raised or whether this year’s budget will leave them with less money to spend. But the common man’s overwhelming verdict is that it’ll be pro-industry.
But in the backdrop of high growth and improving resources, yes, the FM might just prove Friedman wrong. This government’s luck has turned, which is visible in the recently released CSO numbers. Numbers that almost push us into the big league. Numbers that we’ve been trying very hard to achieve for long.
Compared to 23-24 per cent a decade ago, our savings rate crossed 29 per cent last fiscal. Alongside, public sector dissavings turned into a positive 2.2 per cent. Partly because of that, and partly because of funds in the hands of the states, the combined fiscal deficit of the Centre and states has gone down to 7.5 per cent of GDP, compared to 10 per cent in 2000-01. If the government maintains the same pace in revenue collection as shown till January, the tax-GDP ratio will lift to over 10 per cent, closer to the target we’d almost despaired of achieving.
Such a happy confluence of factors imply that, unless oil prices zoom or the rupee nosedives, the FM won’t need to borrow at home as much as earlier years. (ABN-Amro Bank chief economist Abheek Barua estimates five per cent lower gross borrowing at Rs 1,33,000 crore). This may leave the FM free to pursue his reforms agenda: invest in agriculture and infrastructure, and expand the tax base without overfleecing the salaried class.
The tax agenda, therefore, is less cluttered: service tax collection target and base will go up, may even double, while income tax will be spared. PC may succumb to the temptation of one more cess since few protest, but there will generally be no harsh burden. The necessity to cut unproductive expenditure is acknowledged but subsidies may still be ignored due to Leftist pressure. In indirect taxes, the cut in peak custom duties needs to be accompanied with the scrapping of some exemptions in excise.
A comfortable resource situation, however, can trigger the urge to splurge. The worry increases with Congress president Sonia Gandhi expressing the hope that all the priority welfare programmes launched last year "will be adequately funded". That will need a 20-25 per cent rise in gross budgetary support, simply infeasible. Hopefully, better sense will prevail.
As a member of the PM’s economic advisory council says, "the challenge for Budget 2006 is to support the environment of relatively high growth, while sticking closely to the path of fiscal consolidation." Simply, if we’ve been given a chance to build a stronger foundation for consistent 8-10 per cent growth in the next decade, we shouldn’t fritter it away.
