Challenge of reining in fiscal deficit

MR. YASHWANT SINHA's budget for 2001-02, the second to be presented by him on behalf of the NDA Government, may well turn out to be a landmark budget like the exercise of Dr. Manmohan Singh in 1991, when the Narasimha Rao Government assumed power. However, unlike Dr. Singh, Mr. Sinha has no need to worry about the balance of payments position as forex reserves are at an all time peak.

The present incumbent is keen on reining in the revenue and fiscal deficits and at the same time imparting a growth-oriented look to the new budget, but this was considered a challenging task because of mounting subsidies, a slowdown in economic growth and the massive assistance that had to be provided to the Gujarat Government for earthquake relief and rehabilitation operations.

Apprehensions belied

In the event, the apprehensions in stock market and industry circles have been falsified and the budget proposals have, indeed, been framed in such a manner that tangible tax concessions could be granted to income tax and corporate assessees even while making a serious bid to initiate the second generation reforms, revitalising the agricultural sector and ensuring buoyancy in the secondary and primary markets.

The reduction in customs duties, except for the higher levies on agricultural and consumer products to prevent dumping following the removal of Quantitative Restrictions (QRs) on 715 more items from the beginning of April, will result in a loss of revenues. But a fairly large amount is being raised, with a restructuring of excise duties, widening the range of dutiable products and penal levies for discouraging consumption of items that pose health hazards.

While it is claimed that the revenue deficit has been limited to 3.2 per cent of GDP in 2001-02, this is larger in absolute terms at Rs. 78,821 crores (2001-02 budget) against Rs. 77,369 crores, for the current year (revised). The fiscal deficit too will be lower at 4.7 per cent of GDP against 5.1 per cent. But in absolute terms, it will be marginally higher at Rs. 1,16,314 crores against Rs. 1,11,972 crores. While there is no increase under this head in 2000-01, the deficit rose sharply to Rs. 1,04,717 crores (1999-2000 actuals) from Rs.79,955 crores (budget).

In spite of the heavier burden of interest charges, increase in defence expenditure and subsidies, non-plan revenue expenditure in 2000-01 has risen only slightly to Rs.2,30,431 crores (revised) from Rs.2,28,768 crores. Plan revenue expenditure also is higher at Rs.53,104 crores against Rs.52,329 crores (budget). The increase of Rs.2,437 crores in revenue expenditure could be easily offset as revenue receipts were higher by Rs.2,493 crores mainly due to higher non-tax receipts.

The revenue deficit could thus be reduced albeit marginally to Rs.77,369 crores (revised) from Rs.77,425 crores for the first time in recent years.

Fiscal deficit limited to target

The fiscal deficit is not much changed at Rs.1,11,972 crores from Rs.1,11,275 crores notwithstanding a shortfall in proceeds under the disinvestment programme by Rs.7,500 crores over the target. Net market borrowing could be prevented from rising uncomfortably to Rs.77,947 crores from Rs.76,383 crores (budget) as there were increases under other debt and non-debt heads.

In the next financial year, net tax revenue will be rising to Rs. 1,63,031 crores from Rs. 1,44,403 crores and total revenue receipts to Rs.2,31,745 crores from Rs.2,06,166 crores. Aggregate revenue expenditure, however, will be rising to only Rs.3,10,566 crores from Rs.2,83,535 crores even with a higher interest charges, larger defence expenditure and a further rise in subsidies. The revenue deficit will be rising slightly, as stated above. The total Central Plan outlay will be significantly higher at Rs. 1,30,181 crores against Rs. 1,08,587 crores (revised).

Meaningful relief in direct taxes

The growth in gross tax revenues by 14.28 per cent will be facilitated by a continuing rise in receipts from direct taxes even after shedding revenues for Rs. 5,500 crores withn the abolition of surcharges (except for the Gujarat surcharge at 2 per cent) on individual and corporate assessees. The tax on distributed profits, also, is more than halved to 10.2 per cent from 22.4 per cent including surcharges. The reinvestment of capital gains, too, can now be attempted in a manner which will stimulate the equity investment habit.

As the changes in customs duties will be resulting in a loss of revenue for Rs.2,128 crores apart from the shedding of revenues in respect of direct tax concessions, the revised excise duties as well as the new levies on more segments of the services sector are slated to fetch Rs.4,677 crores.

The gross receipts from new and revised levies will, of course, be much higher as significant relief has been given to users of powered vehicles. Essential consumer products will be having lower duties and full exemption has been granted on processed food products with a view to stimulating the growth of food processing industries, construction of godowns in rural areas and subsidising the creation of additional cold storage facilities.

The fiscal deficit, too, will be lower at 4.7 per cent against 5.1 per cent of GDP. But, as stated earlier, it will be rising modestly in absolute terms. Net borrowing will not, therefore, be much changed at Rs.77,353 crores (budget) against Rs. 77,947 crores (revised). There is, of course, the prospect of borrowing on a cheaper basis. A credit of Rs.12,000 crores has, of course, been taken under the disinvestment programme. As the new measures may be helpful in achieving a higher GDP growth of 6.5-7.0 per cent, inflationary pressures may be kept under control, if petro product prices also get reduced with a fall in world oil prices.

While a more tangible effort will have to be made in 2002-03 for ensuring savings in non-plan expenditure, with downsizing the Government, rationalisation of subsidies and other measures, for reducing revenue as well as fiscal deficits in absolute terms as well as in percentages, the progress in the Tenth Plan Period can be really impressive, if investment in the infrastructure sectors as visualised by the NDA Government can be stepped up, foreign direct investment (FDI) flows in in larger volume and FIIs also increase purchases of listed and other securities by taking advantage of the opportunity for increasing their stake to even 49 per cent in Indian companies.

Downtrend in interest rates

The badly needed incentives for saving and investment have thus been provided by the new budget. Interest rates, too, will be tending downward, with the payment of lower interest rates on balances in the Provident Funds and interest charges applicable to National Savings Certificates (NSCs).

As expected, the Bank Rate has been reduced further to 7 per cent. Many banks have been busy making announcements about a reduction in prime lending rates (PLRs) and even lending rates besides pruning deposit rates. It should, thus, be possible to mobilise huge resources through new issues from the primary market for financing projects of public sector enterprises and those in the private sector.

The initial reaction to the budget proposals has, indeed, been favourable though exaggerated fears about a slowdown in the activities of software enterprises have had a chilling effect albeit temporarily. If the monsoon behaves in the forthcoming kharif season and the growth in industrial output is at a faster rate, there is every reason to believe that the year 2001-02 may place the economy on a new growth path.

P. A. Seshan

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