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Murphy Rules

Economic slowdown, feeble policies, low investor confidence, everything's going wrong in the FM

Murphy Rules
outlookindia.com
-0001-11-30T00:00:00+0553

If something can go wrong, it will. —Murphy's law

Murphy was an optimist. —O'Reilly's observation

IF there's any one place in the government where Murphy's Law would be perfectly applicable, it's the finance ministry. Thanks to a worsening economic slowdown, lack of adequate policies, and diminishing confidence of external and domestic investors, everything seems to be going horribly wrong in the department which monitors the purse of the economy.

It's the usual problem: even as the government spends more, earning is less. So, borrowings rise. Especially on the revenue front, there seems to be a significant slip. Consider the figures:

  •  As far as indirect taxes are concerned, customs duties are expected to lag by Rs 4,000 crore behind the original Budget target of Rs 48,148 crore. While rupee depreciation made major imports expensive and low industrial demand discouraged importers, the exchequer also lost a good deal from lower realisations from oil imports. Oil prices are ruling at historical lows.
  •  Against the Budget target of Rs 53,400 crore, finance ministry officials say that the excise shortfall will be close to Rs 10,000 crore. The growth has been six per cent against the target of 21 per cent. The reason: a slowdown in industrial growth.

  •  There's a glimmer of hope, however, in direct taxes. Against the Budget target of Rs 20,930 crore, which assumes a 21 per cent growth, income tax collections have shown a 16 per cent rise. The reason: a big jump in the number of new people who have filed their tax returns or applied for a permanent account number. If the number increases at this rate, the target may be met.

    But overall, tax collections in the first eight months of the current year has reflec-ted an increase of only around 10 per cent or so, over the corresponding period in the last fiscal. The main reason: poor economic growth. Against 6.3 per cent in April-October last fiscal, the first seven months of the current fiscal recorded only 3.6 per cent industrial output growth. The Budget had assumed 10 per cent industrial growth. Now the projections have been slashed to under six per cent. Going by the economy's performance, the target is way too optimistic.

    A preview of things to come was given by finance minister Yashwant Sinha last fortnight when, while convincing his partymen on the need for opening up insurance to foreign firms, he warned against a throwback to the fiscal crisis of 1991. The government later denied these were his exact words. But if Sinha took liberties with the facts to impress upon the swadeshi brigade the inevitability of reforms, he had reason.

    One of them was the drubbing he had at the recent World Economic Forum annual session, where managing director Claude Smadja voiced his fears of India's fiscal deficit in 1998-99 touching seven per cent. He said the situation had the potential to wipe out India's gains in the last seven years of reforms, bringing it close to economic collapse. Retorted Sinha: "I'll do everything to keep fiscal deficit to 5.6 per cent. I should be judged at yearend, not in the middle of the year." A few days later, he was expressing similar fears of a fiscal collapse.

    IN eight months, the government has exceeded its gross borrowings target—Rs 79,376 crore—by over Rs 1,000 cr. Even assuming that small savings collection saves the day at year-end, the likely increase in the fiscal deficit may then be about Rs 13,000 crore-15,000 crore.That is, if expenditure stays at current levels, and revenue collection grows well. The extra debt could still touch 6.6 per cent of the GDP, way above Sinha's dream figure. Needless to say, if revenue collections fall very short of target and real economic growth touches only around 5 per cent as is widely expected, even Smadja's fears may prove optimistic!

    The reasons why the fiscal deficit target would be breached in a major way:

  •  The Rs 95 rise in the minimum support price for wheat will bloat the food and fer-tiliser subsidy bill by over Rs 22,000 crore.

  •  Defence equipment now costs more, with rupee giving less value for money.

  •  The disinvestment target of Rs 5,000 crore will not be met for the third year in a row. The government has realised a mere Rs 225 crore till now.

  •  Beginning this fiscal, the burden of increase in salaries and pension as per the Fifth Pay Commission recommendations shall have to be borne by the government.

  •  Against the FDI target of $6 billion, the government may end up with $2.5 billion.
  •  Post-Budget, the rollback of price hike set back the exchequer by Rs 3,700 crore.

  •  Sectors which have shown a healthy increase in the first nine months: metal products (21.3 per cent), transport equipment and parts (18.3 per cent), beverage and tobacco (16.1 per cent) and paper and paper products (14.9 per cent) and infotech (43 per cent in first half). But none of the core sectors are in good shape.

    The extent officials of the revenue department have gone to fatten the revenue kitty, reveals the measure of desperation that attends Budget figures. Though Sinha announced that revenues earned from the Kar Vivad Samadhan scheme would not be made part of the Budget revenues, senior revenue officials have been on a whistle-stop tour of the country to convince chambers and trade organisations to pay 50 per cent of the disputed amount under the scheme. The finance ministry has handed over the job of writing one lakh letters to Hindustan Thomson Associates. The target? Potential declarants under the Samadhan scheme. A senior official of the Delhi excise commissionerate is calling up the top brass of several firms, urging them to settle disputes under the Kar Vivad Samadhan scheme, which ends in less than three weeks.

    The government has clarified there'll be no fine or prosecution against the names involved in the disputed cases. But the Parliamentary committee on finance has criticised the government for not doing enough groundwork while formulating the scheme's provisions. The committee recommended that the revenue secretary ask secretaries of various ministries to ask the heads of public sector units to utilise the scheme.

    With revenue targets under strain, the pressure on officers is showing. Says a revenue department officer: "If one excise or customs collectorate is doing well, there's added pressure from the ministry to collect more revenues. Zones or collectorates which fail to meet targets are left behind." The period when pressure will be intense is just round the corner.

    The government is expected to move a supplementary demand of Rs 1,000 crore to meet the cost overrun. That will, regrettably, be the first sign that the fiscal situation is under severe strain.

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