Eye on polls

If the Congress fails to make inroads in the BJP-ruled states, economic reforms will be put on the back-burnerN Chandra Mohan DelhiWhat sort of budget will Union Finance Minister P Chidambaram present on February 28, 2008? As this is perhaps the last but one budget before the UPA government's term draws to a close, it will obviously keep the imperatives of fighting the national elections in 2009 uppermost in mind, while, of course, getting its budgetary sums right as per the fiscal responsibility legislation. It will also keep in mind the reverses the ruling Congress has suffered in recent state elections like Gujarat and Himachal Pradesh and ensure that it fares better in the polls ahead in Rajasthan and Madhya Pradesh, among others.Clearly, the budget mirrors political economy factors, including the imperatives of running a coalition government at the national level that depends on the support of Left parties from the outside. The compulsion of fighting assembly elections this year will influence the finance minister to further loosen the purse strings and step up aam admi (common man) giveaways in his budget. If the Congress fails to make inroads in the BJP-ruled states, reforms will be put on the back-burner and more populist initiatives are likely as the ruling party bolsters its position ahead of the national elections. Chidambaram's budget, therefore, will attempt to reconcile the objectives of huge spending commitments due to electoral compulsions while adhering to the discipline of the Fiscal Responsibility and Budget Management Act, 2004 (FRBM), according to which he has to reduce the revenue deficit by 0.5 per cent of the GDP and fiscal deficit by 0.3 per cent every year, starting 2004-05. A revenue deficit is incurred when the government's tax revenues are not sufficient to meet routine housekeeping expenditures of administration. Another word for borrowings is fiscal deficit. The finance minister, for his part, appears confident that he can indeed reconcile the irreconcilable objectives. While not ruling out a further moderation in tax rates, he has indicated that the government will meet budgetary targets on the revenue deficit of 1.5 per cent of GDP and fiscal deficit of 3.3 per cent of GDP despite higher spending in 2007-08. The finance minister's confidence largely stems from the ongoing robust growth momentum of the Indian economy which has grown at a pace of 8.6 per cent in the past four years —that clearly makes India one of the fastest growing economies in the world.Thanks to rapid growth, there has been great buoyancy in tax revenues. In the three years since 2003-04, gross tax revenues of the Centre have grown by 19.9 per cent, 20.1 per cent and 29.3 per cent respectively. Tax collections have also been bullish so far this year with those on personal income growing by 50 per cent and corporate taxes by 40 per cent. Indirect taxes have also registered increases — all of which provide him a lot of room for maneouvre to meet the National Common Minimum Programme spending obligations due to the Left's pressure and the electoral compulsion for populist giveaways while remaining fiscally responsible.However, the bad news is the prospect of the overall growth momentum slowing— down from next year. According to the prime minister's Council of Economic Advisers, overall growth will decline largely due to a deceleration in manufacturing that has been expanding at a double-digit clip in recent years. A stronger rupee has already hit the country's export drive — that implies more sops for exporters — which, in turn, has had a dampening impact on manufacturing growth. Global uncertainties including the prospect of recession in the US, also casts a shadow on India's growth prospects.The rupee has strengthened, thanks to the surging capital inflows into the Indian economy. Although the finance ministry's latest mid-year review for 2007-08 does not mention imposing capital controls, the buzz refuses to go away. Speculation is rife that some curbs are possible in the budget to moderate capital inflows that is sending stock indices to great heights and exerting pressure on the rupee. Foreign portfolio investment has already crossed $17 billion while the rupee has appreciated by 12.4 per cent against the dollar. Will there then be a Tobin-like tax in the budget for 2008-09? Chidambaram's budget would, doubtless, factor in slower manufacturing growth and will be more sensitive to the demands of India Inc — that has a big influence on government's policy — for moderation in rates, including rationalisation of the fringe benefits and cash transaction taxes. The abrupt resignation of an economist responsible for such unpopular revenue raising measures, Parthasarathy Shome, adviser to the finance minister, before the budgetary exercises began, and his replacement by the head of a think-tank of a leading apex chamber of industry lends credence to such an expectation.No budget is, of course, complete without measures to address the agrarian crisis in the economy. Although this sector accounts for a shrinking share of the nation's GDP, the fact remains that 60 per cent of the population still lives off the land. With reports of farmer suicides around the country, the finance minister is likely to announce more waivers of farm loans and crop insurance schemes for providing a safety net of sorts. The National Rural Employment Guarantee Scheme (NREGS) has now been extended all over the country and the higher budgetary allocations are bound to reflect this NCMP-friendly priority.Despite tax buoyancy, higher spending commitments are bound to exert pressure on the revenue side. As per FRBM rules, the revenue deficit should not be more than 45 per cent of budget estimates but it was as high as 85.5 per cent during April-September 2007 itself!  Reducing, if not eliminating, this deficit is the finance minister's major fiscal challenge. All eyes, therefore, will be on exactly how he manages a low deficit of 1.5 per cent of GDP that largely results from the relatively inflexible nature of non-plan revenue expenditures on administration like wages and salaries, interest payments and subsidies.Reining in such expenditures have eluded most finance ministers of coalition governments. Chidambaram is no exception although he has had a dream run of 8.6 per cent GDP growth for his recent budgets. Although tax revenue collections have gone through the roof, how can he get his budgetary sums right if the UPA government is committed to implementing the Sixth Pay Commission award? The Fifth Commission, in fact, had wrecked the government's finances for over decade. Exemplifying such pressures is also the inability to rein in major subsidies, largely food and fertilizers, in the system. Chidambaram has often alluded to the need to target the Public Distribution System (PDS) — as 58 per cent of the subsidised foodgrains hardly reach the beneficiaries mainly the poor —  and other subsidies, but any such reform in his budget is unlikely due to electoral compulsions. This state of affairs means that out of every Re 1 transferred by the government only 27 paise reach the poor — not very far from former Prime Minister Rajiv Gandhi's oft-quoted number that only 15 paise trickled to the intended beneficiaries. If the latter's son, Rahul Gandhi's comments are to be believed, not even five paise reach the poor in states like Uttar Pradesh! Sadly, this is also the prospect for the other budgetary giveaways as the ruling party gears up for state and national elections. The writer is a Delhi-based commentator on economic and business affairs