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S.S. BHANDARE, Chairman, Liberal Budget Drafting Committee, Project for Economic Education, Mumbai, gives in the Liberal Budget his thought-provoking views on building an equitable Indian society. Bhandare is also former Economic Advisor, Tata Services Ltd.

The Indian
Liberal Budget

iven the enormity and complexity of India's socio-economic structure, formulation of a Liberal Budget is not only a challenging task, but one that has to take into account the perils of the unknown involving such external and internal shocks as war, massive oil price hike and natural disasters. Simultaneously, the economic environment is becoming increasingly dynamic thanks to the constellation of forces of globalisation and technological advances. All these impose a powerful influence on budget making and its structure.

Even otherwise, there are veritably innumerable facets of the budgetary framework from taxation to non-tax revenues, from revenue to capital expenditure and from plan to non-plan or from development to non-development expenditure. The Liberal position has to offer its reflections on each of these.

Further, there is a two-way inter-dependence of macro economic factors and each one of these key fiscal parameters. For instance, higher GDP growth and its composition can determine the buoyancy of tax and non-tax revenues. Likewise, healthy revenue growth, other things remaining the same, can facilitate an environment for liberal reforms in tax policy and also better expenditure management.

In contrast, stagnation or sluggish economic growth adversely affects mobilisation of new taxes as well as buoyancy of the existing tax revenues. Other things remaining the same, such a situation can create a major fiscal imbalance, thereby affecting the capacity of the economy to deploy public resources for developmental and capital expenditure. In turn, this can erode the process of productive capacity building, and its consequential growth momentum. Indeed, we have been a witness to this phenomenon for a fairly long time ?from mid-nineties till now.

The growth resurgence of the Indian economy in the current year (real GDP growth expected to cross well over 8 per cent in 2003-2004) is predominantly a phenomenon of (a) remarkable agricultural recovery; (b) significant growth of manufacturing industries; and (c) steady growth of the services sector, including the external trade. However, there is so far no reflection of any major impetus to investment activity except in the area of road development and telecom.

At the same time, further impetus to private initiative, enterprise and investments suffers from want of an appropriate and inspiring liberal economic environment.

The essential point is that the fiscal situation continues to be so severely constrained that it scarcely can generate a momentum of public investment-driven acceleration of growth. At the same time, further impetus to private initiative, enterprise and investments suffers from want of an appropriate and inspiring liberal economic environment.

It is the position of the Liberal Budget that the Indian tax system must surely become globally compatible and competitive. Already, so much has been accomplished over the last decade, particularly after the launching of economic reforms in July 1991. This process has to be sustained and in particular there has to be simplification of tax provisions, rules and administration.

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First, there can be no going back on the current process of reduction and rationalisation of the Indian tax structure. Such tax reforms have, indeed, become an integral and inevitable part of the process of further liberalisation, competition and globalisation.
 

 

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Second, the scope for further scaling down of direct tax rates may be quite limited, although there is considerable scope for fine-tuning both personal and corporate tax rate structure and slabs; eliminating and simplifying many of the existing tax concessions and exemptions; and improving the tax administration in conformity with the recommendations of the Kelkar Committee Report. Also, the two key areas of indirect taxes, namely, excises and customs, must reflect the imperatives of competition and WTO considerations.
 

 

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Third, the realisation of key objectives of tax reforms ?revenue buoyancy, simplification and transparency of tax systems and administrative competitiveness, among others ?is inextricably dependent on further reforms not only of Central taxes, but, more importantly so much needs to be done by the States in their own sphere of taxation. For example, the implementation of the Value Added Tax (VAT) and agricultural income tax by the States. Even the full-fledged coverage of Services Tax requires the coordinated efforts of both the Centre and States, preferably moving towards an integrated VAT (i.e. merging Centre's CENVAT and the existing Sales Tax by the States).

 

It is our belief that with the implementation of the Liberal Budget and consequent distinctive acceleration of long-term economic growth to, say, about 8 per cent per annum, there will not only be restoration of tax buoyancy, but even substantial increase in the tax revenues to GDP ratio of at least 3 to 4 percentage points to, say, around 17 to 18 per cent in the coming years.

The experience of disinvestments of Public Sector Units (PSUs) has so far been quite mixed. The massive success of resource raising through recent public issues of Indian Petrochemicals Corporation Limited, Dredging Corporation, CMC Limited, Gas Authority of India Limited, IBP and Oil and Natural Gas Commission, seems to have made a favourable impact on the whole process of disinvestments that was initiated way back in 1991-1992. Yet, the PSUs disinvestments policy has, by and large, had a chequered career; it has also predominantly been a budgetary exercise, and does not truly reflect a strategic policy of the Government, marking a decisive and significant shift in the ownership and management of public sector businesses.

Although the former Disinvestment Minister Arun Shourie was proclaiming the prospect of raising Rs. 1,00,000 crores per annum, it would have been more realistic to expect such proceeds to rise to about Rs. 35,000 to Rs. 40,000 crores immediately, and then progressively to Rs. 50,000 crores over the next three to four years.

The Liberal Budget is of the view that even with such realistic targets, there would be significant gains in the budgetary outlook, provided there are pari passu efforts to "ring-fence" at least one third of such revenues largely for incremental investments in critical infrastructure projects. This would help in stimulating economic growth, thereby facilitating the process of widening the tax base.

On the expenditure side, the major thrust of the Liberal Budget is on the State's increased social sector commitments. We still have to deal with massive problems of poverty, unemployment, very poor primary education and health care services and various other commitments of security and social safety net. Besides, accelerated process of economic restructuring would continue to be increasingly painful in terms of displacement of jobs and obsolescence of existing skills. The alleviation of this pain would require commitment of adequate expenditure.

An efficient expenditure policy is a
critical component in the strategy for accelerating growth and improving its
quality.

Thus, for poverty reduction, employment generation, reskilling and redeployment of labour, education, health, etc. the Government both at the Centre and States will be called upon to bear increased burden of social sector expenditure. At present, the aggregate expenditure (Centre and States) on social sector comprising education, medical, public health, family welfare, rural development and food subsidy works out to about 8 per cent of GDP and therefore, needs to be raised by at least 4 to 5 percentage points progressively in the next three years.

At the same time, the quality of such expenditure leaves much to be desired. It is only through continuous improvement in the system of governance that we could hope to transmit the true benefits of such expenditure to the intended beneficiaries. This is one of the most formidable challenges highlighted by the Liberal Budget and for which it makes a case not only for budgetary reforms but also for providing far greater transparency and accountability than hitherto. This will ensure a far more enduring impact on the socio-economic profile of the country.

The Liberal Budget strongly recommends that development of the physical infrastructure must have pride of place in our economic strategy for the next five years. Apart from earmarking a portion of disinvestments proceeds for building up a financing mechanism for infrastructure development, we must also consider the urgency of promoting public private partnership and improving further the policy and regulatory framework.

It also needs to be highlighted that, demographically, by 2020, India would have the largest proportion of young people with as many as 270 million new entrants into the age group 15 to 59 years. This is equivalent to the present total population of the USA. And this "Young India" would be capable of generating increased productivity, entrepreneurship and professional skills capable of intensive economic activities. This vibrant demographic structure augurs well for the country, provided, of course, we offer the right liberal economic environment. And this is what the Liberal Budget sets out to do.

Finally, given the prospects of increased tax intensity and better fiscal discipline, we expect the virtual phasing out of revenue deficits in the Indian fiscal situation by 2006. By implication, this factor alone would help in raising savings to GDP ratio of the Indian economy by about 3 to 4 percentage points over a period of next three to four years. Consequently, it may be reasonable to envisage the overall investment ratio to move up from the prevailing stagnant level of about 24 to 25 per cent of GDP to at least 28 to 30 per cent. Moreover, with a sustained improvement in the competitiveness and productivity of the economy together with growing contribution of relatively low-capital intensive, high value added services sector in the economy, the incremental capital output ratio (ICOR) would tend to decline, thereby making the realisation of average annual real GDP growth of about 8 per cent increasingly feasible.

The Liberal position is very clear.
It is that the business of
government is governance and
not business.

In conclusion, let me state that India is on the threshold of achieving an accelerated economic performance in the coming years. Surely, various growth-promoting trends are going to be fortified under the Liberal budgetary framework, leading to sustained higher real GDP growth, and in turn transmitting their beneficial impact not only on the fiscal health, but also on the socio-economic profile of the country in the next few years. We hope that the Government and policy-making authorities are listening!

Postscript:

There was a change of government at the Centre just as we were putting finishing touches to the Liberal Budget. Under the new dispensation, the new coalition Government calling itself the United Progressive Alliance or the UPA has unveiled its Common Minimum Programme (CMP).

The Liberal Budget does not reflect on the CMP. It has been cast independently.

The Drafting Group of the Liberal Budget recognises the importance of the CMP in shaping the future course of economic reforms. We no doubt appreciate the emphasis on the "human face" in the proposed development strategy, but we are concerned with the contrary and ambivalent signals being sent in the approaches to disinvestments/privatisation, labour reforms, subsidies, budgetary management and foreign investment.

We would like to assert that the Liberal Budget is much stronger in its emphasis on a "human face" without diluting the essence of the liberal economic reforms.

Note: For a printed version of the Liberal Budget, please write to Project for Economic Education, 3rd floor, Army & Navy Building, 148, Mahatma Gandhi Road, Mumbai 400 001. Email: ilg@vsnl.net.

 

 

When It Rains ?Letís Not Deaden Our Spirits

When it rains, water arrives fresh, pure and crystal clear. The water then begins its journey pure. It goes through its many travels, down the mountainsides, through the woods and cities. Through reservoirs even through sewer systems. It ultimately winds up looking quite different. Itís still water.

Often it looks and smells very unappealing because of what it has absorbed while on its journey. Even at the bottom of a swamp, itís still water but no more pure, fresh and crystal clear. It only needs to evaporate to become recognisable again as pure water.

Our spirit, like water, begins its journey pure. As it journeys through life absorbing all sorts of impurities, it has eventually to return to its pure state through the natural process of physically dying.

We rarely think or talk about where we came from or what we are here to do. We need to. Otherwise, we deaden our souls, stunt our spirits and live our lives halfheartedly. The search for the soul and the spirit is the search for depth and meaning in our lives. This quest is emerging as a counterforce to the modern technical mindset that can land a man on the moon yet provides few answers for bringing joy to life and meaning to work.

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