Pitfalls of 'Soft' Budgetting Author(s): B. M. Reviewed work(s): Source: Economic and Political Weekly, Vol. 21, No.

10/11 (Mar. 8-15, 1986), pp. 421-422 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4375421 . Accessed: 12/12/2011 23:43
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FROM OUR CORRESPONDENTS

NEW- DELHI
half-hearted, to give a measure of protection to the domestic capital goods industry from unfair foreign competition. These adjustments will also add to government revenues. Some fiscal concessions as well as protection have been extended to small-scale industry as well which hopefully may improve its competitive position in the market and help it to survive in the face of growing market domination of big industry in the regime of liberalised industrial policies. How far these adjustments will prove effective, however, remains to be seen. The play of market forces which is being encouraged as part of the industrial liberalising process has grievously hit the domestic capital goods industry as well as the small-scale industry. The fiscal protection and incentives given to these sets of industries in the budget may not prove adequate for their revival and growth. A provision of Rs 22,300 crore has been made for the Plan in the coming year, representing an increasing of 20 per cent in current prices. Though the level of deficit financing, which is rightly regarded as the most regressive form of taxation with a very high inflationary impact, will still be far in excess of that indicated in the financing scheme of the Seventh Plan, the budgetary deficit in the first two years of Plan would certainly have become unmanageable and the development plan would have been scuttled but for the effort launched to mobilise additional resources for 1986-87. The consumption demand of the upper and middle classes, both in urban and rural areas, which economic policy and management had mindlessly swelled through the 1985-86 budget could have led to an inflationary spiral. The danger of inflation could be averted to some extent because of a large stockpile of foodgrains, the existence of under-utilised manufacturing capacities which have begun to be tapped and liberal imports. But unchecked deficit financing in the coming year, combined with hikes in administered prices, would have activised the inflationary pressures so far dormant in the economy. The additional resource mobilisation effort which has been launched for the coming year may now be expected to help prevent this from happening. In this sense, the budget for the coming year can be said to be non-inflationary. This consideration has apparently also influenced the decision to withhold substantial fiscal concessions to the corporate sector and give only some fiscal sops to the middle classes. However, the claim of the Finance Minister, that the inflationary impact of his first budget inspired by the economic liberalisation philosophy has been contained because the rise in wholesale price index so far in 1985-86 has been only 3.4 per cent as against 5.4 per cent in the corresponding period last year is not well-founded. The rise of consumer prices has tended to be far more than that in the wholesale price index. Worse still, the rise of prices, wholesale as well as retail, has tended to be far higher in the case of wage goods as well as capital goods and 421

Pitfalls of "Soft Budgetting

BM
THE -tore the Prime Minister fumbles in handlinp complex and difficult problems, the more aggressive and defiant his public postures and speeches see.n to be'come. The latest of his performances in this context was the chuilish attack in the Rajya Sabha on Opposition parties and leaders for what he alleged was their lack of appreciation of his government's budget for 1986-87. He charged all opposition parties and leaders with being pro-rich and indeed s,ith having vested interest in perpetuating poverty. He had, on the other and his Finance MNinister hand, taken up the heroic tasks of poverty alleviation and denelopment by their hard decisions on resource mobilisation and allocation. If he is thus attempting, as the Finance Minister has also been doing after the presentation of the budget, to wipe out the stigma of the elitist orientation of the government's economic policies, this only shows his desperation and his inability to cope with the mounting problems and tensions in the economy. society and polity. The note\xorthy feature of the budget for 1986-87 in any case is not a break with the pro-rich orientation or the start of an antipoverty thrust. It is. in fact, partly a political-populist exercise to contain the popular backlash against the pre-budget hikes in administered prices and partly a desperate attempt to restore some degree of viability and stability to the budgetary balance %hich, according to the Finance Minister's admission, had come under as "severe strain" e%en the so-called process of liberalising the economy wvas pursued recklessly in the last fifteen months. It is interesting to find, therefore, that big business circles and upper middle professionals, who had been so enthusiastic about the promises of rapid liberalisation and modernisation of the economy, are beginning to express grave apprehensions that the budget may block the further strengthening and cfinement of the liberalisation policies and indeed the entire process of liberalisation set in motion by the Rajiv Gandhi government's first budget last year may not only lose momentum but even come to a grinding halt. There are others w ho had misgivings about the handling of the liberalising trends in official policies and are suggesting that problems generated by tgo fast a pace of liberalisation are now being better appreciated among official policymakers and planners. This has helped, according to this view, the adoption of some corrective measures, though still half-hearted and halting, to strengthen more purposeful intervention by public authority in the economic development process. It can indeed be argued that the budget for 1986-87 is a step, but only a step, back from the precipice and may postpone the financial disaster to which the budget for 1985-86 was leading. The drift of budgetary policy. resulting in large losses of revenue and mounting expenditure on the demands of elitist consumption under the banner of liberalisation and pseudo-modernisation, would appear to have been halted at least for the time being. The Union Finance Minister, V P Singh, had prepared the ground well for the presentation of his budget this year. Besides a sustained public relations campaign to sell the broad parameters of his budget, which was advertised as an exercise in demystifying the budget, he had taken the sting out of the budget by announcing wvide-ranging prebudget hikes in administered prices which took care of the major part of the revenuerising effort to balance the budgetary sums. The exercise of balancing the budget could thus be made to look effortless. He has also been able to put forward a mix of fiscal measures. which could be attractive for tax payers as well as the domestic capital goods industry and small-scale industry and yet would raise additional revenue to the tune of Rs 490 crore. Together with the revenue estimated to be raised by the pre-budget price hikes, V P Singh has mounted an additional resource mobilisation effort which is by any standard massive. It has helped him to show the budgetary deficit at a level which he can claim to be manageable, Rs 3,650 crore in contrast to Rs 4,490 crore in the revised estimates for 1985-86. He could also comfortably give some sops, especially to the middle classes, by adjustments in direct taxes, among them income tax. It has indeed been an exercise in soft budgeting par excellence for which the Finance Minister can claim kudos. It has also been a positiv\e effort at safeguarding the Seventh Plan. The financial position of the Union government had been brought to such a pass that there appeared little scope for the budget to come to the aid of the Plan. A semblance of budgetary balance and measure of viability to development planning has now been restored. This is emphasised by a step-up of Plan outlay by 20 per cent over last year's outlay. Unlike the first budget of V P Singh which wantonly sacrificed large revenues and cheerfully accepted the dilution of the development role of the state as part of the philosophy of economic liberalisation, the second budget has shown much greater awareness of and responsibility towards the imperative demands of planned development on the budget. This will at least keep the poverty alleviation schemes in the Seventh Plan running. At the same time, public enterprises will not be completely hamstrung for want of investment funds for the development of essential infrastructure for economic growth. Welcome in this context also are the fiscal adiustments, even though

March 8-15, 1986

ECONOMIC AND POLITICAL WEEKLY

development inputs. This phenomenon has tended in recent years, and particularly in the current financial year, to become more marked. It signifies that incomes and standards of living of the working people and the mass of the poor as well as the growth potential of the economy and the size of the Plan in real terms are eroding at a faster rate than suggested by the inflation rate measured in terms of the movement of the wholesale price index. This trend in prices with all its deleterious effect on economic growth and mass welfare can only be strengthened by the type of resource mobilisation effort that has been mounted by V P Singh in his second budget. Apart from some fiddling wvith indirect taxes, especially customs duty, reliance has been placed almost entirely on increases in administered prices, including prices of primary wage goods such as foodgrains. As against more than Rs 2,000 crore which are estimated to be realised by the government from price hikes in the coming year, net additional revenue from customs duties is estimated to be Rs 407 crore, from excise duties only Rs 60 crore and from direct taxes a paltry Rs 21 crore. The fiscal scheme of the budget thus remains in with the socially regressive economic liberalisation philosophy. The equity thrust of fiscal policy has in the process been gravely weakened. It is still considered necessary to make benevolent fiscal gestures in direct taxes for the benefit of the middle classes. In respect of indirect taxation too, the much-lauded Modvat (modified value added tax), which has been introduced on a selective basis, is a fiscal adjustment which could weaken the principle of progression in respect of taxation of articles of upper and middle class interest. NModvat cain have little relevance for wage goods or articles of mass consumption. Fiscal benevolence towards the upper and middle classes, in respect of both direct and indirect taxes, will in no way become any the less on account of the increase in duties on motor cars, colour TV and air-conditioners. V P Singh probably thought that a populist anti-rich gesture was called for at some point in his budgetary exercise in order to withstand the resentment against the pre-budget price increases and the overall elitist orientation of the government's fiscal policy and economic growth strategy. But he cannot hide the fact in spite of the much-advertised improvement in tax complaince and tax collection in response to 'reasonable' tax rates and efficient tax administration, the declining trend in the ratio of all taxes and more markedly direct taxes to growth in gross domestic product (GDP) has been hardly reversed. V P Singh is still nowhere near meeting the demand of the planners that this ratio be raised by as much as 2 percentage points-which they consider crucial for the successful implementation of the Seventh Plan. On the contrary, his budget can only strengthen the declining trend in the ratio of taxes to GDP, particularly direct taxes. The fanfare which V P Singh has announced the rise in collections from direct taxes by 422

22 per cent in the current year (by 36 per cent in the case of income tax) should not be allowed to detract attention from the fact that the improved tax collection has been in response to immunity against punitive action in respect of evasion of direct taxes in past years. The fact is that the reduction in tax rates in the budget for 1985-86 will become effective only in the coming year. It will be then seen whether 'reasonable' rates will produce the same buoyancy in tax collections as immunity from tax evation has done this year. V P Singh may have to face much disappointment on this score. While noting the plus points in the budget fo; the coming year, it will, however, not do to lose of sight of the fact that the financial and fiscal flexibility that has been displayed in the making of the budget for the coming year hardly corrects the larger and more fundamental distortions which have come to plague the budgetary balance in the past five years when reckless spending has outpaced mobilisation of real resources. The position has got aggravated in particular during the last year when large revenues were sacrificed
and expenditures allowed to grow unchecked

in a fanciful search for easy paths to growth and modernisation. The result has been that the deficit on the revenue account which was estimated already to have grown to Rs 5,601 crore when the budget for 1985-86 was presented last year has further increased to Rs 5,940 crore in the course of the year, as per the re ised estimates, and is now estimated to swell to Rs 6,874 crore in the coming year. The Finance Minister has

evidently been unable to cope with this structural imbalance in the budget. The growing revenue deficit in the budget means that the government is unwilling or unable to raise revenue to meet expenditure on even internal and external security and orderly administration. The result is that resources raised in the name of development have to be diverted for other, non-development purposes. The upshot is that requirements of even administration and security, not to speak of development, have to go by default and in the process the whole structure-social, economic and political-comes under-strain. There is thus no side-stepping the task of resource mobilisation. But the idea that this has to to be done exclutsively through the price instrument, while being soft to those with incomes and wealth, can prove to be economically counterproductive and socially regressive.Deficit financing is unquestionably the most regressive and destabilising form of taxation and has to be kept within safe limits. Borrowings, not only external but also internal, is becoming increasingly costly and alreadv the burden of interest payments on the exchequer has grown as big as that of defence. There is no way, therefore, to correct the fundamental imbalance that has in enmerged the government budget except by exercising the prerogative of the state to deepen and spread taxation of incomes and wealth, especially incremental incomes and wealth. The official policy trend, however, is going in a contrary direction which is not only extinguishing the equity thrust of the fiscal instrument but also aggravating the overall budgetary imbalance.

PUNJAB

Drift to Disaster
Lessons of the Nakodar Incident
Sucha Singh Gill
THE Punjab crisis and its handling have led to the emergence of organised forces capable of generating a much deeper crisis. Unless serious attempts are made to reverse the process, there will continue to exist the possibility of the state being plunged into the worst kind of communal clashes. The recent happenings at Nakodar, a subdivisional town of Jalandhar district, amply demonstrated how communal tension can develop. It also shows how an incident of accidental fire in a religious place be exploited by interested forces when people of the two communities come to develop prejudices against one another. According to the 1981 Census, Nakodar town has a population of 26,000. Like other towns of Punjab, Sikhs constitute 20-25 per cent of the total population. But the town is surrounded by Sikh peasantry-dominated villages. Unlike other towns of Pubjab, it had been free from any tension or communal disturbance in the past four years. In the town there is a historic Gurudwara built in mnernory the fifth Sikh Guru, Arjun Dev. of It is in this Gurudwara that six copies of the Guru Granth caught fire and burnt on February 2. At about 9.30 am, wife of the Granthi, Sukhchain Singh, noticed the fire and raised a hue and cry. People of both the Hindu and Sikh communities assembled and put out the fire. One Hindu youth got his hands burnt in the process. The Granthi was away at that time, performing a marriage ceremony. People of all religious communities were shocked at this incident. The local Gurudwara committee was convinced that the fire was accidental. Thecommittee decided to immerse the burnt copies of the Granth in the river. A tractor trolley was also arranged for the purpose. But they were not allowed to proceed by the All-India Sikh Students Federation (AISSF) and United Akali Dal workers who were bent upon using the situation to create an ugly situation and bring discredit to the Akali Dal (Longowal) government. Next day, February 3, a complete hartal was observed in the city and a protest march was jointly organised by both Hindus and Sikhs. The peace was disturbed