Walking a tightrope

The coming budget will be an exercise in many forms of balance — Left and Centre, higher taxes and faster growth, market exigencies and the sanctity of jobs

Paranjoy Guha Thakurta Delhi

The Union Budget of the Government of India is much more than a bland presentation of a balance sheet of the country's finances: it is invariably a statement that outlines the economic and political policies of those in power. When, on the last day of February 2005, the Harvard-educated lawyer-turned-politician, Union Finance Minister Palaniappan Chidam-baram, stands up in the Lok Sabha to present the Budget for the coming financial year, 2005–06 — his fourth budget since 1996 — his pronouncements will certainly reflect the uneasy balance that will have to be struck between the views of the Congress and those of the Communist parties, on whose support the survival of the United Progressive Alliance (UPA) government is dependent.

Prime Minister Manmohan Singh and Chidambaram represent a section within the Congress which is overly enamoured of free markets and want India's economy to be speedily integrated with the rest of the world. For this team of gung-ho liberalisers — which includes Deputy Chair-person of the Planning Commission, Montek Singh Ahluwalia — growth seems to matter more than anything else. For the Left, on the other hand, growth of Gross Domestic Product (GDP) is meaningless unless accompanied by equity and creation of jobs. The Marxists have an ally and proponent of their viewpoint in UPA Chairperson and Congress President Sonia Gandhi, not to mention a socialist faction in the country's grand old party.

Among the Communists, too, there is a section that is not particularly apprehensive of — or worried about — the entry of foreign capital, and believes that one must learn to live with multinational corporations so long as new employment opportunities are created. This new-Left ideology is epitomised in the personality of West Bengal Chief Minister Buddhadeb Bhattacharjee. At the same time, Chidambaram would be foolish to believe that the entire Communist Party of India (Marxist), the largest party in the Left, subscribes to the Bhattacharjee school of thought. He will, thus, have to balance the conflicting interests of ideologically-disparate groups not only within his party, the Congress, but also among the Marxists. This is easier said than done.

Witness, for instance, the finance minister's inability to convince the Left that the foreign direct investment (FDI) cap applicable to privately-owned telecommunications companies should be increased from 49 per cent at present to 74 per cent (which is currently being held in a non-transparent manner). Detailed letters have been exchanged between the two sides, but the Left has stuck to its position. The government has also not been able to increase the FDI cap in insurance companies from 26 per cent to 49 per cent. These were among the proposals made by Chidambaram in the budget he had presented on July 8, 2004.

The Communists have, however, gone along with the government in supporting its decision to hike the FDI limit in the civil aviation sector. Moreover, the Left has agreed with the government's intention to allow foreign banks to increase their control over private Indian banks in a phased manner and permit mergers and amalgamations of small public sector banks — once again, on the condition that jobs would not be lost.

Significantly, in spite of initially expressing its opposition to the scrapping of Press Note 18 — which provided protection to domestic industry by disallowing foreign partners of joint ventures in the country from setting up their own ventures without the prior permission of their existing partners — the Left has not made a noise about the government's decision to do away with this controversial note. The move to scrap Press Note 18 on the ground that it was anachronistic, had outlived its utility and was discouraging foreign investors was announced on January 12 by the prime minister himself in the presence of the West Bengal chief minister at a function organised by the Confederation of Indian Industry (CII) at Kolkata.

How well the Congress and the Left cohabit remains to be seen, but there is one crucial issue that Chidambaram must address in the coming budget that will test his abilities to raise resources. This issue pertains to the employment guarantee scheme that has been outlined in the UPA's May 27 national common minimum programme — which is to provide a legal guarantee for at least 100 days of employment in a year to at least one able-bodied member of each family for the creation of public assets. The Left, as well as members of the National Advisory Council headed by Sonia Gandhi, have already expressed their unhappiness about the bill that has been introduced on the ground that the scope of the proposed employment guarantee scheme has been drastically circumscribed.

Figures about how much the Central government would have to spend on implementing the scheme vary between Rs 12,000 crore to Rs 40,000 crore. The midyear review of the economy released on December 23 by the finance ministry states that "the budget is likely to be under stress from demands for several additional expenditure commitments", especially "two rather large demands…that appear difficult to accommodate within the overall budgeted level of expenditure". These relate to the requirement of government-funded foodgrain for employment generation programmes due to the expansion of the coverage of food-for-work schemes and also for calamity relief works. Interestingly, this observation was made before the tsunami disaster occurred. The second large demand relates to higher fertiliser subsidies due to an increase in the costs of petroleum-related feedstock.

In certain respects, Chidambaram's task has been made easier by the improvement in the health of the economy. After a spurt in the inflation rate, largely on account of the sudden increase in international prices of crude oil, the rise in prices has tempered considerably. Foreign exchange reserves continue to remain buoyant — these stand at over US$ 120 billion.

In dollar terms, exports rose impressively by 24 per cent in the April–November 2004 period against a rise of 8.5 per cent in the corresponding period of the previous year. Imports rose by an even higher proportion in this seven-month period — by 34.5 per cent, thanks to the jump in oil imports by nearly 56 per cent. Part of this rise is on account of the relative strength of the Indian currency vis-à-vis the dollar.

On the agriculture front, despite a none-too-good monsoon, farm output is not expected to dip during the current year — agricultural production had shot up by 9.1 per cent in 2003–04 after declining by 5.2 per cent in the previous year. Industrial output went up by 8.4 per cent in the first six months of the current fiscal year against 6.2 per cent in April–October 2004. Infra-structure has improved and so has the performance of the services sector. The overall rate of growth of GDP during the year that will end in March 2005 is likely to be around 6 per cent.

Whereas the fiscal deficit is more or less under control, Chidambaram's challenge will be to control the burgeoning revenue deficit of the Central government. The revenue deficit was almost 84 per cent of the budget estimate for the current year at the end of October, against just over 63 per cent in the corresponding April– October period in 2004. The midyear review states that the revenue deficit has gone up because of a slower than anticipated growth in the government's tax revenues — 20 per cent during April–September 2004 against 25 per cent assumed in the budget. This, in turn, is a consequence of a number of factors including lower collections, delay in the passage of the Finance Act, post-budget duty concessions and higher devolution of funds to states.

How the finance minister will seek to raise revenues remains to be seen. The services tax net is almost certain to be widened. The goods transport sector could again be sought to be taxed despite the protestations of truckers. He would also seek to better target food and fertiliser subsidies as well as subsidies on kerosene and cooking gas. Attempts will probably be made to step up collections of personal income tax. Less than 3 per cent of India's population pays income tax at present — to be precise, there were 29.64 million income tax assessees at the end of August.

Chidambaram is committed to rationalising excise duties and paring customs duties. He also wants to send out favourable signals to foreign investors. The chances of taxes being levied on foreign institutional investors are somewhat remote — the finance minister recently dispelled doubts that had risen in this regard on account of a statement made by the Governor of the Reserve Bank of India, Y Venugopal Reddy. Because of the introduction of value-added tax (VAT), the Union government would be recasting the manner in which central sales tax is collected and devolved. There is talk of reducing the incidence of stamp duties on property transactions. It is also evident that the disinvestment programme will be intensified while ensuring that the government will retain managerial control over profit-making public sector enterprises.

But what is not clear is where the money to fund the employment guarantee scheme and various social sector programmes will come from. The finance minister would love to present a "dream" budget that would be welcomed by corporate captains and the capital markets. But earning kudos from the representatives of the CII or the Federation of Indian Chambers of Commerce and Industry (FICCI) may not necessarily be welcomed by Chidambaram's "conscience-keepers" on the Left side of the political spectrum. The finance minister and his boss, the prime minister, may well choose to present a relatively "tough" budget by increasing some taxes while the honeymoon period of the UPA government still lasts.

The author is Director, School of Convergence and a journalist