Three cheers to the finance minister!

Close on the heels of the first budget, the second one now clearly
sets out the agenda. It is fiscal consolidation and a big push to
second generation of reforms. Will the government be able to do it?
To this end, the government must have the political courage and
wisdom to keep its commitment regarding the proposed downsizing
and the labour market policies.

Highlights

• The budgeted fiscal deficit of the Centre in 2000-01 is estimated at Rs.1112.80 billion, based on a possible real GDP growth rate of 7 per cent and an inflation rate of 5.7 per cent. For the first time in the past decade, the consolidated fiscal deficit of the Centre, states and public sector undertakings will decline assuming an unchanged level for states' fiscal deficit in 2001-02.
• Even though the revised fiscal deficit figures for 2000-01 reveal a marginal slippage, the revenue deficit is budgeted to finance a record high of 71 per cent of the fiscal deficit in the next fiscal, the highest ever in the last three decades.
• The outlay on defence has been increased marginally by Rs.2360 crore. The revised figures for 2000-01 also have been slashed.
• The share of gross tax revenue to GDP will rise from 9 per cent to 9.2 per cent. This is much less than the pre-reform 1990-91 ratio of 10.8 per cent.
• Excise tax collections are supposed to rise by Rs.11,040 crore. This translates into an industrial growth of 8-9 per cent. Excise tax collections have fallen short of the targeted amount on an average by Rs.2200 crore for the five-year period ended 2000-01. The plausible reason for the shortfall in excise tax collections is the inability to tax the unorga-nised service sector in the face of shift in national income in favour of services in recent years. The budget this year addresses this issue of taxation of services.
• Corporate tax collections are projected to climb up by Rs.5500 crore. Since corporate tax collections are directly linked to the real GDP growth rates, and given that real GDP growth is projected to be 7 per cent next fiscal, it is likely that this targeted collection will be achieved.
• Budgeted disinvestment receipts in 2001-02 at Rs.12,000 crore is an overestimate, given that only Rs.2500 crore was mobilised in the current fiscal year, against the budgeted amount at Rs.10,000 crore.
• Gross market borrowings of the Centre in 2001-02 will be Rs.123,348 crore. But gross borrowings through dated securities in 2000-01 will be Rs.4896 crore less than the budgeted figures for 2000-01. This will definitely put downward pressure on the interest rates.
• Net market borrowings of the Centre in 2001-02 are estimated at Rs.77,353 crore, a decline of Rs.3917 crore over 2000-01.
• Public sector undertakings will borrow Rs.29,290 crore from the market in 2001-02, as against Rs.19,120 crore in 2000-01.
• Transfer to states (net of interest receipts and recovery of loans and advances) is budgeted to increase by Rs.10,979 crore in 2001-02. Of the total transfers, the share in total tax collections will rise by Rs.9200 crore. As a share of GDP, the net transfers will rise to 3 per cent of GDP from 2.8 per cent.
• Total public debt for 2000-01 will rise to Rs.952,528 crore. As percentage of GDP, it will decline to 38.5 per cent from 39.3 per cent. The average cost of government borrowings in the current fiscal will also decline to 10 per cent.
• The subsidy bill is expected to increase to Rs.29,801 crore, eating up 12.9 per cent of the total revenue receipts during 2001-02.
• Interest rates small savings cut by 1-1.5 percentage points. This will give a fillip to the primary capital market.
• The ceiling of FII investment raised to 49 per cent.
• The existing three ad valorem rates of basic excise duty converged to a single rate of 16 per cent. About 80 per cent of the revenue in respect of ad valorem duties will come from the single rate of 16 per cent and about 17 per cent from the combined rate of 32 per cent.
• Customs tariff would be brought down progressively within three years and number of rates to be reduced to the minimum with a peak rate of 20 per cent. The surcharge of 10 per cent to lapse on 31 March 2001. Peak level of customs duty consequently declines from 38.5 per cent to 35 per cent.
• All surcharges payable by corporates and non-corporates removed but for surcharge of 2 per cent for financing National Calamity Contingency Fund.
  
• The budget reiterates to continue with zero-based budgeting.
• Steps towards reducing fertilizer subsidy as recommended by the Expenditure Reform Commission initiated. Dismantling of the APM in the petroleum sector, increasing postal charges and increasing the PDS price of sugar also planned in the budget.

Strengths

• Plans to downsize government. All requirements of recruitment will be scrutinised to ensure that fresh recruitment is limited to one per cent of total civilian staff strength.
• To reduce government expenditure on wages and salaries, steps such as introducing VRS scheme for surplus employees, suspension of LTC for two years, increasing rent on government accommodation and reviewing pension system have been taken.
• Essential Commodities Act, 1955 to be reviewed and restrictions on the free inter-state movement of foodgrains to be removed. The number of commodities declared as essential under the Act to be brought down.
• BSRB to be abolished by 31 July 2001 or earlier. Banks to do all future recruitment themselves.
• Rationalisation of the tax structure, reducing multiplicities and arbitrariness.
• Indian companies allowed to invest abroad up to US $50 million annually through the automatic route without being subject to the three year profitability condition.
• Intensification of infrastructure investment, continued reforms in the financial sector and capital markets, deepening of structural reforms - dismantling controls constraining
  economic activity.
• Attempt to induce states towards fiscal disclipine.
• Gross budgetary support for the Central Plan being increased by 18.8 per cent to Rs.59,456 crore in 2001-02.
• Dividend tax reduced back to 10 per cent.

Weaknesses

• Lack of political courage to tax agricultural income.
• The revised estimates for total plan outlay for the major social sectors show a decline of Rs.1243 crore over the budgeted figures. The maximum reduction is for health and family welfare programmes.
• In the last budget, the Finance Minister had announced a new scheme Sarva Shikha Abhiyan to universalise elementary education and to ensure that all children are enrolled in school by 2003. To achieve this goal, elementary education (primary and middle schooling) was allotted funds of Rs.3728 crore. This has been reduced to Rs.3250 crore in this budget. There is also no mention of the Education Guarantee Scheme introduced in the 1999-2000 budget. Interestingly, it has been estimated that to provide quality education to primary school children alone, an additional allocation of Rs.28,129 crore would be needed over a five-year period.
• Even after the proposed downsizing, the budget document shows that as of now government departments will be smaller by only 8100 employees in
  the fiscal.
• Continued categorisation of expenditure into plan and non-plan, and deve-lopmental and non-developmental categories adding to non-transparency of government expenditure.
• The budget is still to have a multi-year perspective. In the UK, for instance, budgets lay down limits on expenditure that departments can control, for a three-year period, allowing flexibility and incentives for managing the budgets. The practice of spreading resources over too many projects continues.