Budget 2009-2010: Fighting shy of Mobilizing resources, fighting shy of Spending

Spending Too Much or Too Little?

In today’s context, the need for significantly expanding government expenditures arises from at least two sources. One is the impact of the global crisis which has meant that the economy immediately is confronted with a problem of inadequate demand to which stimulation of demand by public expenditure is the effective antidote. The second is that independent of the immediate problem of the crisis there exists a huge backlog of deficiencies in our ability to provide even the basic needs of the majority of the populace and in our infrastructure. Private expenditures cannot be expected to meet these needs and the levels of public expenditure in many of these areas are currently woefully inadequate. The crying need of the present hour is therefore expansion of public expenditure: to generate gainful employment for the vast majority of the population; in the social sector; and for developing the country’s infrastructure, in particular rural infrastructure.

The Finance Minister in his budget speech sought to give the impression that the budget for 2009-10 was strong on the expenditure side both from the point of view of providing a stimulus to an economy adversely affected by the global crisis as well from the point of view of generating inclusive growth. Many commentators in the media have gone along with this view. However, in reality the Finance Minister has been long on rhetoric and rather short on actually making expenditure commitments. A few simple facts are worth noting in this regard:

1. The finance minister has budgeted for an increase in expenditure (in nominal terms) in 2009-10 by just 13.3% over the revised estimates for 2008-09, as compared to an expected increase in nominal GDP of 10.65%. As a ratio of GDP, central government expenditure is expected to be only 17.4% in 2009-10, only marginally above the level of 16.9% in 2008-09 and the 17.1% level that existed way back in 2003-04 (when the fiscal deficit was 4.5% of GDP). It may also be recalled that the bulk of the ‘extra’ expenditure of last year over the original budget estimates happened in the second half of the year, (despite this and other ‘stimulus’ measures, the growth in the last two quarters of 2008-09 over the previous year came down to just 5.8%). This means that the finance minister is budgeting for the whole year an expenditure level in relation to GDP that is certainly not higher than the expenditure in the second half of 2008-09 and may even be lower. This is even though this would be the first year in which the full-year effects of the implementation of the pay commission will show itself in expenditures.
2. Of the total increase in expenditure over the revised estimates for 2008-09, as much as 27% will be on account of interest payments and another 22.61% will be on account of defence expenditure. In other words, 50% of the total increase in expenditure would be on these heads alone, which means that apart from these and additional expenditures on account of salaries of government employees hardly any increase in expenditure has been budgeted. Subsidies for example are budgeted to actually come down (in absolute terms) by 15% over the revised figures for 2008-09 (mainly by reducing fertilizer subsidies). The assistance to State and UT plans is budgeted to increase by only 8.22%, which means that the share of this expenditure head in GDP would come down. This would be in addition to the expected decline in the states’ share in Central tax revenues from 3% of GDP to 2.8%1.
3. The allocation under the central plan assistance directly transferred to states/district level autonomous bodies/implementing agencies for the department of rural development (which includes the expenditure on NREGS and other such schemes) has been increased by a mere 3.7% compared to the revised estimates of 2008-09 [Rs. 58840.98 crores in 2009-10 BE as compared to Rs. 56710.34 crores in 2008-09 RE].

In other words, any claims that the budget has provided any significant expenditure stimulus to a flagging economy or that the expenditure thrust is on the ‘aam aadmi’ have to be discounted. They are simply not true.

Not Enough Money to Spend?

In his defence, the Finance Minister is likely to say that he has done all that he could given the constraints, since the fiscal deficit is going to increase to 6.8% of GDP and far away from FRBM targets. He has also faced criticism from some quarters on this count. The Minister may also say that the large interest burden of this year is because of the expansion of the fiscal deficit last year. Even if one accepts that the fiscal deficit is a serious problem and that the government has no option of borrowing at a cheap rate, these arguments would be credible only if it was the case that the finance minister had exhausted all options for generating revenues. But is that the case?

Based on the tax proposals in Budget 2009-10, the gross tax revenue is estimated to increase by a mere 2.09% compared to the revised figures for 2008-09. Its share in GDP is estimated to come down from 11.8% to 10.95%, with the centre’s share slated to decline from 8.8% of GDP to 8.1%. Despite this low level of increase in tax revenues, total revenue receipts are expected to increase by Rs. 52,324 crores over RE 2008-09 or an increase of 9.03% on account of higher non-tax revenues. The bulk of this higher non-tax revenues (Rs. 35,000 crores) are expected to be raised from the auction of 3G spectrum, which is not a regular revenue source. The estimated increase in total revenue receipts excluding this special item  is estimated to be a mere 3.08%, which would reduce its ratio to GDP from 10.6% (2008-09 RE) to 9.9% (2009-10 BE). In other words, the estimated relative level of revenue this year is less than that of last year by 0.7% of the GDP. This abysmal picture on the revenue front is by no means inevitable – if it transpires it will be only on account of the finance minister’s sins of commission and omission.

Except for some revision in the Minimum Alternate Tax (MAT) (against which too a concession has been given by allowing the tax credit to be carried forward for ten years), no effort has been made to garner additional revenues from corporate taxes. In the last few years, corporate profits have boomed tremendously, and even without an increase in rates the share of corporate taxes to GDP has increased from just 1.9% in 2002-03 to 4.17% in 2008-09. In 2007-08 this ratio was 4.1% while the effective tax rate (as specified in annex-12 of budget 2009-10) was only 22.24% (for private sector companies it was even lower at 21.28%). This means that taxable corporate profits alone have become 18.44% of GDP2. 53% of these profits (according to the same annex-12) are accounted for by a mere 190 companies which earned profits over Rs. 500 crores in 2007-08(from amongst more than 4 lakh companies filing returns)3. This represents a staggering level of concentration of income that in itself demands measures of higher levels of taxation (specially if we are to talk of inclusive growth in any serious sense). Instead we have a situation where companies are not paying even the statutory rate of 33.99%.

In 2008-09 as per figures in annex 12, the corporate tax revenue foregone by the government on account of various concessions was Rs. 68,914 crores. But the Finance Minister has chosen to be kind to the big corporate sector and avoided taking what should be amongst the most obvious measures for generating substantial additional revenues – eliminating the concessions which allow a handful of big companies to avoid paying the statutory taxes and to even tax them a little more heavily. He has however not forgotten to cede to their demand for abolishing the fringe benefits tax.

The Finance Minister has not only been kind to the big corporate sector in general by not reducing tax concessions, he has also benefited some particularly favoured ones even amongst them by adding to the list of tax concessions. Clause 13 of the Finance Bill to introduce a new section 35AD in the Income-Tax Act and Clause 37 to amend Section 80 1B of the Act may be mentioned in this regard. The first proposes to allow all capital expenditure incurred during the year to be fully allowable as a deduction to specified businesses (those operating ‘cold chain’ warehousing facilities for storing agricultural produce and those laying and operating cross country natural gas or crude or petroleum oil pipeline network). Clause 37 seeks to extend to natural gas the tax holiday hitherto available in respect of profits arising from the commercial production or refining of mineral oil. Clearly it will be a few larger companies that will benefit from these, benefits that the country can ill afford to provide at the current juncture.

In the case of personal income-tax too, while the budget has proposed a series of concessions and relief to income-tax payers, no attempt has been made to ensure that the very rich amongst them pay more taxes. While the increase in the exemption limits will bring extremely nominal benefits to tax payers with lower incomes, those with incomes above Rs. 10 lakhs shall benefit substantially from the abolition of the surcharge, a measure that is going to cost the government some Rs. 5000-6000 crores of revenue. In a poor country like ours facing grim economic times, should the miniscule category of people with Rs. 10 lakh plus incomes qualify for tax relief (particularly when the maximum rate of tax is only 30% and becomes applicable for an income of Rs. 5 lakhs onwards)? Should not instead the Finance Minister have focused on ensuring that the rich do not get undue benefit of the various tax concessions available so that the revenue foregone on account of these (Rs. 39,553 crores in 2008-09 as per appendix-12) can be reduced?

The nature of the bias that the government has towards the rich and prosperous is also highlighted by at least two other measures – increase in the net wealth limit beyond which wealth tax becomes payable from 15 lakhs to 30 lakshs4 (ie. a doubling) and the reduction in excise duty for large cars/utility vehicles of engine capacity 2000cc and above. The Finance Minister has also quickly ceded to the vociferous demands of speculators by abolishing the commodities transaction tax just a year after it was introduced.

The Finance minister has chosen not to reverse the large excise duty reductions implemented last year as part of the “stimulus package”, even though an expenditure equivalent to the consequent revenue loss would have been a more effective stimulus measure. More generally, even in a year when he expects customs and excise duty collections would be generally lower in absolute terms than in the previous year, he has not taken any measures to check the huge indirect tax revenue losses on account of various rebates and concessions. It may be noted that the total revenue losses on account of concessions and rebates on both direct and indirect taxes in 2008-09 (Rs. 418095 crores) was 68.95% of the aggregate tax collection in the same year, up from 48.16% the previous year. This figure was 1.28 times the fiscal deficit – in the absence of these revenue losses there would have been no deficit!

To put it in a nutshell than, the sum total of the tax proposals put forward by the finance minister in budget 2009-10 amount to a virtual abdication of his responsibilities to garner revenue for the government to finance much needed expansion of its expenditure programme.

What Does this Mean?

The unwillingness to extract resources from those who can and should be paying more taxes means that the resources available with the government would be limited. With such limited resources, even by incurring a fiscal deficit of 6.8 % of GDP the government would not be able to spend enough. Since it insists on meeting this deficit through high cost market borrowing rather than borrowing from the RBI, the deficit would inflate future expenditure. At the same time, since the demand-stimulating expenditure would be inadequate, the economy may be more sluggish than expected which would mean the revenues may be even less than anticipated. In other words, even without adequate meaningful expenditure the stage may have been set for an increase in interest payments and the fiscal deficit. These would be of the government’s own making, but then would be used as the pretext to further constrain public expenditure. This highly avoidable unfortunate result may be the legacy of Budget 2009-10.