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The Rediff Budget Jury/Dr Subir Gokarn

'The government has chosen the easy way out by loading extra taxes on the salaried class'

BUDGET 2000

I think the Budget is extremely disappointing. I think the Economic Survey laid out a very bleak picture of the fiscal situation, and primed us to expect something dramatic by way of fiscal consolidation. There is nothing concrete in the Budget.

The one hope which has been expressed and I hope will materialise is the enactment of the Fiscal Responsibility Act, which the FM has indicated will be introduced this year.

There are a number of good things in the Budget. But they are all largely incremental in nature. There is nothing dramatic comparable to -- for instance, the housing initiative last year -- which I think substantially contributed to the improved performance of the economy last year.

The statement on public sector banks continuing to remain PSU banks is quite disappointing, both from the economic and customer standpoint.

The intentions to tackle the exploding subsidy bill on food and fertilisers are appreciated but the approach does not seem to be able to meet the desired objective.

I think we used to have the Hindu rate of growth of 3.5 per cent a year for the first 30 years. After Independence, we went up to 5.5 per cent during the 80s and around 6 per cent in the 90s. We have now settled at that level and will continue to be there unless something dramatic happens on the fiscal and infrastructure fronts.

This Budget was a tremendous opportunity to put in place some long term policies on these two fronts. It was wasted.

If we observe the behaviour of the government over the last decade, we cannot but come to the conclusion that it only acts sensibly in a crisis. In 1991, major government agencies were abolished as part of the burst of reforms that took place at that point of time.

This Budget indicates that we are fast heading for another fiscal crisis. I don't think the government will have any option but to do more of the same. The question is whether you do it strategically, so that you get maximum savings for minimum reduction in government services provided, or you do it in a state of desperation without concern for the effectiveness of the process.

One way or the other, it has to be done. I wish this Budget had preferred the strategic route rather than postponing the desperation route to subsequent budgets.

This year the revised estimate of fiscal deficit was 5.6 per cent of the GDP compared to 4 per cent in the Budget estimate. So, I don't think the degree of slippage will be as high as this year because the economy is recovering. But given the budgeted level of 5.1 per cent of the GDP, I wouldn't be surprised to see it edging towards 6 per cent of the GDP.

There are always political considerations in a Budget. This time they became visible even before the Budget -- when the regional parties in the NDA opposed the LPG and kerosene price hikes.

I would suspect that the recent state election results have somewhat changed the balance of power within the NDA in favour of the regional parties. This Budget with its rather lukewarm efforts to cut subsidies and other expenditure may have been influenced by these election outcomes.

In this context, the enactment of the Fiscal Responsibility Act is of great significance. I believe, at this point in time, there is widespread consensus in this country on the basic direction of economic policy, the relative role of public and private sectors and the priorities for the government, particularly in the social sectors.

Given that consensus, it is a shame that the Budget-making process is somewhat held hostage by short term political considerations. What the FRA would do is to enshrine that consensus into legislative restrictions on the Budget-making process, and would therefore, protect it from day-to-day politics. So, as I said in my opening statement, as bad as this Budget has been, if an FRA is enacted during the year, a lot of lost ground could be recovered.

The best way to raise money is to cut useless and wasteful expenditure, which there is so much of in the government. If you improve the quality of public services, I presume more people would be willing to pay for those services, as well as pay taxes for the overall establishment of these services. So both things have to go together, widening the tax base and cutting expenditure while improving the quality of public services.

Unfortunately, the government has chosen the easy way out by simply loading extra taxes on the group whose income is most easily identifiable -- the salaried class. You would remember that this class was the favourite milch cow of the socialist governments of the 60s and 70s, when the marginal tax rate went up as high as 97 per cent. It is far from that now, but two years of surcharges should cause this class a great deal of discomfort, as well as a sense of injustice about why they are being singled out.

There is no question that we will see reforms in the face of a crisis. But the question as to whether it is a year or two away is difficult to answer. Very often, the precipitating factor in a crisis is an external development -- say an increase in the oil price or a sudden withdrawal of foreign funds. Favourable external circumstances give us a little more freedom in managing our domestic affairs. I would not be so certain about the timing of the next crisis. It can be avoided if the government takes some essential steps immediately.

Dr Subir Gokarn is Chief Economist, National Council for Applied Economic Research.

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