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'Quake surcharge likely in budget'

Noted economist Bibek Debroy has said that the government is likely to impose a Gujarat calamity surcharge in the coming Budget in addition to the two per cent surcharge announced shortly after the earthquake.

Since the government has not specified that the surcharge is a calamity surcharge and that Prime Minister Atal Bihari Vajpayee has gone on record stating that it is not enough and he will tax the affluent, there will be a calamity surcharge in the Budget, Debroy predicts.

Director of Rajiv Gandhi Institute of Contemporary Studies has said that going by the 'historical track record of the government' in the wake of quakes, drought and cyclone; the surcharge is likely to be used to 'make the fiscal balance easy'.

Debroy said that there was a need for careful evaluation of the defence budget, drastic pruning of subsidies, including a complete revamp of the public distribution system, and expenditure reforms, specially downsizing of the government. He also said that the there was a need for stepping up public investment in agriculture and industry and ensuring utmost efficiency in this regard, removing incentives on small savings and reducing interest rates.

The other important subject that the budget will address is disinvestment and reform of the public sector.

The economist further said that the funds from disinvestment proceeds should not be used for bridging budgetary deficits, but for retiring government debt.

The biggest failure of the reforms has been the steady decline in public investment since 1991. He said that the government should not be too fetish about fiscal deficit as it was only a number. However, the more important question is public expenditure, which should be used for capital formation, not for meeting current consumption.

Disputing industry estimates of loss at Rs 250 billion, Debroy said: "the proper economic cost is not much as there is little evidence of destruction of industries, both big and small. The economic cost has been mostly due to workers' absenteeism."

"Further, the quake would have a positive impact on the economy as the reconstruction work would give a push to demand for items like steel and cement, but there would be a slump in the sale of consumer goods in the affected areas with people shifting their priority to house building," he said.

Terming Gujarat as 'resilient', Debroy says the affected areas will bounce back to normalcy within a year. Essentially, resources are not a problem with rebuilding of the state.

Gujarati NRIs, corporates, and international community, including multilateral agencies and other voluntary contributions, are garnering large amounts.

Asked what is the likely thrust of the budget, he said that since 1991 every budget was given as a policy direction.

''But in this particular budget, I expect no major policy change. It will be merely about numbers.''

There may not be any change in the tax rates or import duty, which, however, needs to be brought down.

On the need for curtailing revenue expenditure, Debroy said that the four major areas for this aspect are interest payments, subsidies, wages and salaries of government employees and defence.

While retiring government debt with funds from PSU disinvestment can reduce interest payments, defence expenditure needs a thorough review as 75 per cent of it is on wages and salaries.

Advocating scrapping of fertiliser subsidy straight away, the economist wants restriction of food subsidy only to the needy poor by totally revamping the public distribution system. The present procurement system suffers from the 'inefficiency' of the Food Corporation of India.

The government has been talking of reducing government staff, but nothing has happened since 1991 and in the last two years their strength has, in fact, gone up. The government is looking for a 'pretext' for doing nothing by appointing another Expenditure Reforms Commission, he said.

Other ways of reducing expenditure on staff include restriction on foreign travel, which alone accounts for Rs 20 million daily, and cars, each one of which cost Rs 50,000 per month by way of maintenance and drivers.

A cut in interest rate is imperative for reviving industrial growth. He suggests removal of tax benefits on small savings and assured returns on these by the government. If the tax benefit is taken into account, the effective return on such savings works out to 14 per cent. This is the reason for high interest rates, which make the Indian industry less competitive. The interest rates should be left for the market to decide.

Further, a proper climate for making private investment attractive and higher public investment in infrastructure and spending it efficiently will reverse the slowdown.

In order to promote agriculture growth, he suggests lifting of inter-state movement of foodgrains, introduction of agriculture insurance in place of crop insurance, involvement of the corporate sector and provision of credit for marketing of farm produce.

It is necessary to make public sector banks answerable to shareholders by bringing them under the Companies Act. Under the present Banks Nationalisation Act, the government can retain control even if it had no equity holding.

Import tariff has gone up over four years and it is too high. There is need to bring them down.

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