Background

In a meeting with economists in early January, the Finance Minister asked for recommendations for the forthcoming budget. The consensus that emerged was a collection of the obvious and the apparent. The economy is doing well, albeit with a few dark clouds originating largely from across the borders, tax collections are at an all time high, general elections will be announced sometime in the next 12 months, and the government will go to polls with the inclusive growth message. The budget will therefore play to the gallery, and the FM will have the wherewithal to do so. None of the economists present asked for a tax rate cut, and neither did the FM venture into that discussion space; many called for simplification of the tax regime but the stress was missing; there was a lot of talk on ensuring efficiency in expenditures, but again it was apparent that that was beyond the FMs domain. Since then there has been a buzz around issues ranging from farmer debt to introduction of the GST; these and other issues are discussed below.

The Economy

The budget is being presented for the financial year 2008-09 amidst the backdrop of high wage pressures from the Sixth Pay Commission and coming elections while inflation and growth concerns are expected to become more acute. But the boom in the economy will continue albeit at marginally lower levels. 2007-08 will see the economy growing between 8.5-9% while the year ahead is also forecasted to have moderate growth of around 8 to 8.5% provided of course that the international economy holds up. Where are the dark clouds?

An international environment that is not conducive to high growth as the US grapples with a possible recession,
Heightened uncertainty in financial markets with the sub-prime crisis
Inflationary pressures from crude, commodities and food domestically
Insufficient build-up in infrastructure within the domestic economy
Lack of attention to raising productivity in agriculture
Monetary tightening of the past 3 years is expected to continue for another quarter to stem inflationary pressures, though banks have begun lowering rates on housing and consumer durables
rupee appreciation with the strong economy attracting foreign inflows

Taxation

The government has benefited with higher revenues from taxes – direct taxes have risen by 41.4% in the period till 15^th February 2008. But this is only partly due to high economic growth. (i) Increased coverage of service tax, (ii) tax deducted at source and at double the rate of the previous year, (iii) greater computerization and associated linking of upstream and downstream suppliers and buyers, have all contributed to the large increase. What this means is that the advanced tax figures next month will not be too high (because higher TDS has already captured a large part of that amount), so the overall growth in tax collections will be lower, though no doubt quite high compared to the past. Moreover, the slowdown in growth has been quite apparent since the past few months and this will also affect tax collections somewhat. While the government is expected to remain on target with the target of attaining a fiscal deficit of 3% of the GDP, this has to be seen in the light of oil and other bonds remaining out of the accounts as presented. There has been a great buzz in the past few weeks around the Goods and Service Tax (GST). Indeed when put in place this will benefit all, but will have tremendous positive ramifications for the domestically oriented IT sector. Senior economists and policy makers have called for instituting this and doing it rapidly. In the views of the authors however, at very best there will be an announcement of a staggered implementation, with little happening in the coming year. There are numerous issues that will need to be ironed out before the GST can be introduced in full force. For instance, the Constitution prevents the states from imposing taxes on services, the issue of integration of local taxes such as octroi is always a political hot potato, the treatment of inter-state transactions is another. When it is put in place companies need to revamp their systems of accounting and invoicing etc. Given the challenges in Centre- State coordination and addressing administrative procedures, such a tax will take a few years to roll out and take full effect across the country. In other words, GST will happen, but not now. It is unlikely that direct tax rates will be cut, though there is serious talk of increasing the personal income taxation limit from 1 to 1.2 lakhs. The only reason this may not occur will be the need to keep the deficit under the 3% mark, as long as the FRBM does not get in the way this is a high likelihood case. Last, it is not clear what prompted the FM to first put in place and then retain the FBT and the cash withdrawal tax. Rumours are that some otherwise reform minded economists suggested it, hopefully he will not continue to follow such advice blindly and do away with these stupidities. But again, rumours suggest that these will be retained.

Expenditures on the Underprivileged

With high growth and unequal access to opportunities, social tensions have been aggravated and the spotlight on inequality has intensified. (Expenditure inequality measured via the Gini coefficient has gone up from 0.29 to 0.30 in rural and 0.34 to 0.38 in urban areas between 1993-94 and 2004-05). Income inequality is likely to have increased far higher during this period. Moreover, it is apparent that the salary and asset price boom (bubble?) of the last three years has further exacerbated the problem. And the perception of rich getting richer has serious political ramifications. The budget will attempt to take this problem head-on in the only way a central-leftist coalition can – greater transfers to the poor. Hence the NREG will be expanded and large allocations will be made. This has been more or less already announced officially. Other forms of transfers will include old age pensions, unorganised sector support etc. The political pressures for such schemes are large, but the FM will try to hold out as it is unclear how these can be instituted without leakages. In all likelihood some announcement will be made, but in the fine print there will be some clause that will make such schemes defunct at the outset – or rather that’s the best we can hope for. [The Planning Commission has also been quite active on this front. The Eleventh Plan has focused on inclusive growth as its theme and with the impending elections, social handouts will be seen as the politically acceptable solution, even though more effective methods of delivery of subsidies through for instance biometric smart cards, using the IT skills for which the country is famous for, go ignored.]

Agriculture

On the agriculture front, the figures are better than in the nineties; expected increase in agri output is in the 2.7% range for 2007-08. But productivity levels for a range of food crops especially cereals are stagnant (and even falling in some high productivity districts). Through the NREG and Bharat Nirman and such programs greater hardware (read canals and drains) will be supported in the budget. But the election year will prevent any of the critical ‘soft’ elements (read agri-trade laws, revamping the extension system, etc.) will be largely ignored. The ‘soft’ elements take many years to put up, are not immediately visible, and need active implementation on the part of the state governments. But the hard infrastructure is easier to put up and is more visible. In the budget to be presented on February 29^th, the issue of farmer suicides is expected to figure prominently, as before. According to the budget session speech by the President a loan waiver scheme was under consideration by the government. The PM himself has reportedly been meeting his political seniors for the purpose on numerous occiasions in the last few weeks. Needless to say no one in the Finance Ministry will support such a scheme, it will affect the fiscal as well as affect long term loan collections. The FM himself mentioned that farmer suicides were generally among those who went to private moneylenders, not those who had gone to public sector entities. He probably was referring to the Tata Institute of Social Sciences (TISS) report on farmer suicides in Maharashtra, that found that 75% of farmers had taken loans from non-formal sources. Small and marginal landholders suffer the most with 80% borrowing from moneylenders. But whatever be the FMs opposition, on this one we expect that loan waivers of some type will be announced, the financial sector will not take the hit however – this will be met from the budget.

Manufacturing Sector

Another issue that will be taken up is the concern of the exporters in the face of the appreciating rupee. The rupee has appreciated almost 11% in 2007 and merchandise exports have risen only 7.74% in the period April-December 2007 in rupee terms compared to 28.65% in April-December 2006. Though the government and the Reserve Bank have been telling exporting firms to face up to a world of competition and a rising rupee and concentrate on productivity and quality raising measures, this sector will be targeted for relief from taxation in the budget. We would also expect some other mechanism for protecting the small exporter from exchange rate fluctuations. Note the emphasis on the term ‘small’. The auto and auto components sector could get some relief, as excise duty cuts are long overdue. Muralidhar writes in the Hindu “Though Mr Chidambaram had hinted last year that the wait will be short for the automobile industry, political and budgetary constraints could see him put off excise duty cuts once again”. Not merely the auto sector, also expect the cutting of excise duties for items of mass consumption and also some in the Pharmaceuticals sector. Overall, the government will seriously consider cutting peak customs duties, especially due to overriding concerns on inflation.

The IT sector

The star of the Indian economy, the IT sector, has been facing tough times as global concerns and rupee appreciation have been taking their toll on profitability and sales growth. With companies cutting back on hiring plans, going in for salary cuts, setting up and expanding subsidiaries in other countries, the year ahead will be a challenging one for the Indian IT industry. The IT industry is too much identified with large corporate sector and high incomes, and the left would oppose sops to this sector at this juncture, it remains to be seen whether the FM goes out on a limb on this one. Computer hardware however may receive some indirect tax benefits.

Education, Vocational Training, and Arjun Singh

Long-term concern remains in education where skill development and employability concerns remain to be addressed. While drop out ratio has improved, emphasis on quality of education being imparted is needed. A host of studies have come out in the last year dealing with the problem of employability. The HRD ministry however has not taken this into its ambit. Pressure from large corporate houses and academics may lead to some action towards increased private sector initiatives specially in the vocational training sector.

< Prev		Next >

Newer news items:

Older news items: