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'Popular mood impacts budgets'


KS NARAYANAN | New Delhi, March 1, 2012 17:42
Tags : budget | economic instrument. |

Analyst D.H. Pai Panandikar, president of RPG Foundation, a New Delhi-based think-tank and former secretary general of FICCI explains the importance of Union Budget. He has little hope on reforms from finance minister Pranab Mukherjee who will present his seventh Union Budget. Excerpts from an interview with KS Narayanan

What is the importance of Union Budget? 
The Budget is an extremely important economic instrument. For one, the total expenditure is now about 15 per cent of the GDP. This is a huge portion. Whatever happens to the GDP also influences the budget. So that is one aspect of the totality of the budget. Other is the policies that are initiated when budgets are announced. More recently budget has become an occasion to announce economic policies. So it influences the behaviour of the economy. Third aspect is political, because it addresses the people. For instance, subsides are about 20 per cent of the tax revenue of the government. Subsidies influence the attitude towards government. New subsidies and facilities impact elections. It is a political instrument in that sense.
What is the framework for any budget?
There are certain expenditures that are constant. For example interest payments on market borrowings made by the Central government. It is a huge accumulated debt accounting for two-thirds of GDP. On this account there is an interest obligation. One cannot get away with it. Other is defence. Third is subsidy. If you put these things together it is about 86 per cent of the government’s revenue, is already committed. There is little flexibility left for other expenditure. Then the other things, which the government has to do is on-Capital Account-the expenditure on the plan and loans to states. This is where government has maneuverability. There you are borrowing to implement projects. If you look at the budgets through time this is the part of budget which always becomes victim. In order to keep the fiscal deficit down, the government cannot reduce revenue deficit. That is why it has to reduce capital expenditure. That is why in all the budgets and also in coming budget, the capital expenditure will not be according to the budgeted outlay. It will be less. The revenue expenditure will be more than what has been budgeted. That is why we get a distorted picture.
It is on this framework the budget is prepared.
What are crucial inputs for making budget?
One is purely the accounting part of it which takes place much before the budget is presented. Policy part comes before the budget and is decided on the basis of current economic and political situation. Budgets that are presented immediately after elections will find a lot of policy changes. A year or two before the general elections, there will be no major policy announcements. For instance the Foreign Direct Investment in retail was announced earlier in 2011 because the elections are still far away in 2013-14. So people would forget it. No government would have the courage to announce it in 2013 as it is too close to General Elections. So you will find too little reforms before elections.
So popular mood determines budgets? 
Yes. Very much. As far as policy is concerned, the government has to keep in mind how people will react. By people I mean industry, investors and other stakeholders. That is why after the budget presentations, there are a lot of reactions which the government observes. They make their own assessment. Any increase in tax or tax liability will get a reverse reaction. It may be planned by the government. Eventually people may accept it because of economic reasons. Government also makes changes before the budget is passed as a financial bill after the discussions in the Parliament.
Does the government accept recommendations given by different interest groups? 
I have attended many of the pre-budget meetings as an economist as well as part of industry body FICCI. Most suggestions given by the industry are not given due importance. Finance ministry makes assessment on suggestions given by different lobbies on how it would impact the overall economy or else it would garner profit for the particular stakeholders. I would say hardly 20 to 25 may have been given due importance by the government.
Does this include the tax concessions for the industry?
The industry will always suggest cuts in corporate tax. Corporate tax has been cut. It was 50 per cent, now it is 30 per cent.
What about cuts in customs and excise duties?
It is not due to lobbying by industrial houses, but due to WTO agreement, bilateral treaties and international requirements. Industry does not want customs duty to be cut as any cut here means more competition for domestic players. But it is internationally necessary. Otherwise nobody will trade with you.
There is wide perception that industry garners more sops say compared to farm sector.
I do not agree. First there is a strong lobby of farmers in the Parliament itself. If you look at the no of MPs, many of them are agriculturists. But the government has done quite a few things for the farming community. They are getting subsidies on fertilisers, assured minimum support price for various products, occasional writing off farm debts etc. Even in the current UP elections, Samajwadi Party supremo Mulayam Singh Yadav says debt to Rs 3000 would be written off if he comes to power. So farmers are not neglected. They are reasonably looked after. Farmers are not properly organised and are decentralised. That is the problem.
Farm sector growth has crawled below the 4 per cent mark for decades now. 
Budgets cannot determine agricultural growth. It is a state subject. State governments have to take better initiatives to boost farm productivity-in terms of quality seeds, better irrigation etc.
State governments also look at Union Budgets. 
States look at Union Budgets for revenue. There is a revenue sharing between Centre and States. This is decided by Finance Commission. That is why states have tremendous interest in the Finance Commission. A portion of revenue collected by the Centre goes to states. Secondly there are taxes which are of interest to Centre and States. But VAT has not been introduced by all the states.
The new thing that is coming is Goods and Service Tax. But GST has become a political issue at the moment. It was to be introduced this year. That implies the power of states to impose taxes is taken away by them and is replaced by uniform taxation. This happens everywhere and is a global phenomenon. But there should be complete homogeneity between Centre-States if you want to have an effective tax system. With sales tax, each state becomes a separate market. If there is a GST you will have uniform market. So states and political parties must realise they cannot succumb to narrow political considerations.
Do you expect major reforms in the budget? 
I do not expect any reforms in the budget. The little reforms government tried to do like FDI in retail failed to come through. Parliament is fractured at the moment and even the allies do not accept government proposals. In that situation what kind of reforms can we expect? If you reduce subsidies on oil- UPA allies Trinamool Congress and DMK would make noises.
Will the Euro Zone crisis influence the coming budget to give away incentives? 
The current crisis is different from 2008
Both quantitatively and qualitatively it is different. In 2008 the crisis took place in US with the banking system coming under tremendous pressure. That was a very widespread crisis. It was not restricted to America. It had wider ramifications. Banks are a totally integrated phenomenon in Europe. Then there was a sharp decline in GDP in US and the crisis looked widespread. The current crisis is restricted to Europe and problem is faced by a few states-Italy, Greece, Spain and Portugal which are under pressure. Even if a small country like Greece goes bankrupt some of the banks in Europe could go bankrupt. We are not affected by that as our banks are not holding any securities of the banks. Both Reserve Bank of India and other Central banks hold securities of US government.
I do not think concessions for reviving the economy are going to cut any ice with the Finance Minister. The reason why the Indian economy has gone down is not because of euro zone crisis but because of inflation and tightening of monetary stance by RBI.
Will the budgets impose new taxes this year?
New taxes will not be there. Service tax will be expanded to new areas.
Do you think GST will be implemented?
It has to be approved by states first and it may need a constitutional amendment. 
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Issue Dated: Feb 5, 2017