Economics India

Tuesday, February 28, 2006


The General Budget for 2006-07 presented by the by the Finance Minister, Shri P. Chidambaram today in the Parliament was well-received in the Indian press and the business community. It’s a FEEL GOOD and will probably be a DO GOOD budget as well, if the Finance Minister does not ignore issues in public expenditure efficiency, for reasons of political expediency and poor budget management!

The budget includes a number of initiatives that will help spur economic growth and provide justice to the disadvantaged sections of the society. The bulk of the budgetary resources will go for UPA government’s eight flagship programmes – Sarva Siksha Abhiyan, Mid Day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child Development Services, National Rural Employment Guarantee Scheme and Jawaharlal Nehru National Urban Renewal Mission. The total allocation for these programs at Rs.50,015 crores will be 43.2% more (in nominal terms) compared to the last year's allocation of Rs.34,927 crores.

The central government’s total revenue receipts are estimated at Rs.403,465 crores, revenue expenditure at Rs.488,192 crores, and consequent revenue deficit at Rs.84,727 crores (about 2.1% of the GDP). Allowing for the capital expenditure, the fiscal deficit is estimated at Rs.148, 686 crores (3.8% of the GDP). The Finance Minister has tried to keep the fiscal deficit within acceptable limits with the hope that inflation will be contained. Much of the increases in international oil prices are being subsidized by GOI and state governments to contain inflation. In this process, the budgetary funds available for capital investments remain very much constrained. We need to watch how far the domestic and interntional borrowing programs, FDIs and private sector investments help raise the savings/investment rates.

Continuing the emphasis on tax reforms, the Finance Minister has proposed rationalization of some of the indirect taxes while expanding service tax net, given that this sector now contributes about 54 per cent of GDP. As a step in the direction of a progressive convergence of the service tax rate and the CENVAT rate, the Finance Minister has proposed to increase the service tax rate from 10 per cent to 12 per cent. The net impact of this increase is, however, likely to be very small. The Finance Minister has set April 1, 2010 as the date for introducing national level Goods and Service Tax (GST).

As for the direct taxes, the good news is that there will be no change in the rates of personal income tax or corporate income tax, nor any new taxes are being imposed. The Finance Minister has proposed to revise certain tax rates in the quest of equity. And which government can afford to take the political risk of imposing direct taxes on agricultural incomes, even after excluding a substantial threshold to cover subsistence farming as well as risks in farming. Certainly not the UPA government --- the previous BJP-led government could not do this. The Kelkar Committee Report which attempted to deal with this topic remains on shelf, gathering dust.

The Finance Minister’s tax proposals on the direct taxes are estimated to yield about Rs.4,000 crores. On the indirect tax side, the gain is estimated at Rs.2,000 crores. These amounts are negligible relative to total revenues, expenditures and revenue/overall fiscal deficits. It remains to be seen if the rationalization of indirect and direct taxes proposed in the budget will help maintain the growth in revenues that was seen during 2005-06 --- if not, increase in fiscal deficit will be inevitable --- RBI is already on its way to increasing interest rates to contain expected inflation.

The Finance Minister noted that while the world has recognized the potential of India. “It is now for us… rediscover the greatness of this country and the potential of its people. The young people of India are building castles, it may appear that those castles are in the air….it is our duty to put the foundations on which the young can build their castles.” So true.

In the same spirit, this blog is concerned with efficiency of public expenditure and overall budget management including delays in or shortfalls in release of funds against budgetary allocations approved by the Parliament; expenditures incurred on activities without approval of the Parliament; use of quasi-budgetary sources of funds to finance government programs; and continuation of inefficient, untargetted, subsidies that not only contribute to distortions in the economy but also perpetuate inequity and doll-out mentality at various levels. Improved budget management is critical to achieve goals intended by the new budget.

Let us address some of these questions as we go along in the context of various programs funded by the budget while recording satifaction that the new budget will help to sustain the overall economic growth rate of about 7% p.a during 2006-07.


  • I agree with the point that India's budget management must be improved --it should go beyond budget accounting on which much time and energy is spent at all levels.

    And local politicians must be kept at an arm's length to ensure that scarce resources are used for legitimate purposes in timely and efficient manner.

    By Anonymous Anonymous, at 9:43 PM  

  • Dr. Deshpande

    This is a reasonable introduction to the budget. But we should think in terms of what has not been accomplised. We should debate that !

    What do you think of lower tax rates for farmers?

    And how can we get the Agriculture sector to grow ?

    And what about reforms - this missing link in the budget?

    I think our economy should grow in all directions -not just IT/BT. If we can get rural incomes to rise - can you imagine its multiplier effect on the economy.

    Any thoughts...


    By Anonymous Anonymous, at 4:47 PM  

  • Thanks for the comments above from the Anonymous. Indeed, a lot has not been accomplished by this and earlier budgets, which is usually attributed to "political economy and governance". We will surely debate each of these areas --one budget proposal that is designed to fail is assuring farmers that they will get short-term credit at 7% for loans below Rs. 300,000. Credit programs involving interest subsidies (not capital subsidies) have failed world-wide. We will get to this topic soon. Keep interested and do comment. Thanks.

    By Blogger Ramesh G. Deshpande, at 5:20 PM  

  • Very interesting comments above. We will get to each of the topics in the near future. Agriculture has serious problems due to lagging technology, especially for the unirrigated sector and in the irrigated sector, there are serious resource availability and management problems. IT/BT and the rest of the service sector is now contributing 53% of GDP and will be a major source for public revenues. Please await more detailed comments. Thanks.

    By Blogger Ramesh G. Deshpande, at 9:53 AM  

  • Budget is one thing. What is important is how much of the allocation really goes in needy hands. It is said that in Maharastra under the Rojgar hami Yojana generates 60% of the amount goes to local politians and govt. officials.Feel good budget is only for those in Urban areas and for common man in village it is same story year after year.Unless Navanirman type revolution engulfing entire nations with new and young leaders come up things are not going to change. Unfortunately even in politics dynastic rule is becoming common and our rural population is still in Zamindar /savkar and sansthanik era. 60/70% population is in villages and unless their mentality changes there is no hope for improvement.

    By Anonymous Anonymous, at 4:45 AM  

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