Budget 2007-08
M. Govinda Rao Director, National Institute of Public Finance and Policy.
Member, Economic Advisory Council to the Prime Minister
Introduction
Budget: Not a mere income – expenditure statement. It provides policy direction for price stability, economic growth and its spread. Budget 2007-08 is supposed to manage growth, control inflation and ensure fiscal prudence. The budget is presented in the background of:
To what extent can the budget achieve the tasks it has set out?
Buoyant economy, but infrastructure constraints. Sound fundamentals but rising inflation rate; First year of the 11th plan; Half way into the tenure of the government – Clamour for more spending on NCMP. Buoyant revenues and expectation of reform towards GST; Pressure to enforce fiscal austerity in the wake of competing claims to from infrastructure spending and implementation of NCMP.
Fiscal Adjustment: Targets n Achievements
Fiscal Deficit: Performance according to FRBMA targets: 3.7% in 2006 and 3.3% in 2007. Possible to reduce it to 3% in 2008-09. Revenue Deficit: 2% in 2006 and 1.5% in 2007. Difficult to phase it out in 2008-09. “Creative accounting” to achieve the targets. Need to target PSBR. Legislated fiscal discipline: How effective are they? How sacrosanct are these targets?
Nature of Fiscal Adjustment
Nature of fiscal adjustment since FRBMA. (Table) Is it only due to increase in revenue buoyancy? 2.2 percentage points.(9.2 to 11.3%). Increase in transfers to states and autonomous agencies Decline in the own expenditures. Fiscal federalism implications:
Improved state finances; Severing the Wicksellian link: Substitution or flypaper effect? Accountability and delivery systems;
Table 1 Fiscal Trends of Central Government from 2001-02 to 2007-08
Percent of GDP 2006-07 RE 2007-08 BE
Percentage Point Change
20062001 20062003
2001-02 Gross Tax Revenue Non-tax revenue Gross Revenue States’ Share in Taxes Grants to States Net Revenue to the Centre
Transfers to autonomous agencies Net direct expenditure by the Centre of which: Interest Payment Revenue Deficit
2003-04 9.20 2.78 11.98 2.44 1.80 9.54 n 11.29
4.49 3.55
8.20 2.97 11.17 2.35 1.89 8.83 n 11.32
4.71 4.39
11.36 1.88 13.24 2.96 2.23 10.28 1.09 8.99
3.55 2.03
11.98 1.80 13.79 3.15 2.31 10.63 1.07 8.81
3.48 1.56
3.16 -1.09 2.07 0.61 0.34 1.46 1.09 -2.33
-1.16 -2.36
2.17 -0.90 1.27 0.52 0.43 0.74 1.07 -2.30
-0.94 -1.53
Fiscal Deficit
6.18
4.46
3.70
3.30
-2.48
-0.76
Note: n – negligible. Source: Budget Documents of the central government (various years).
How Has the Adjustment Come About?
Percentage Point Changes to GDP
2006/2001 2006/2003
Gross Tax Revenue Non-tax revenue Gross Total Revenue
Shared Taxes Plan and Non-Plan Grants
3.16 -1.09 2.07
0.61 0.34
2.17 -0.90 1.27
0.52 0.43
Net Revenue Transfers to State/District level Autonomous Bodies
Centre’s Direct Expenditure
1.46
1.09 -2.33
0.74
1.09 -2.30
Interest Payments Revenue Deficit Fiscal Deficit
-1.16 -2.36 -2.48
-0.94 -1.53 -0.76
Growth Concerns
Both manufacturing and services recorded double digit growth in 2006-07. Agricultural sector is marked by low growth and volatility. Considerable focus on agricultural sector in the Speech, but very little action. The various initiatives in agriculture and irrigation add up to less than 0.2 per cent of GDP (Table). Fertiliser subsidy is a scandal. Increasing subsidy is not a solution. Plan capital expenditure increase was just about 9 per cent. Aggregate capital expenditure excluding the capital swap of State Bank of India in 2007-08 estimated at 10.4 per cent. Much of the increase is in Plan revenue spending (20.6 per cent) to meet NCMP. Central government is taking major initiatives in social sectors. With Bharat Nirman and Flagship schemes claiming large resources, centre is intruding into areas traditionally meant for the States. Not much improvement in implementation machinery. Severing the link between revenue – expenditure decisions. Much of the increase is in expenditures to be implemented at state and autonomous body levels. Concern of poor delivery systems.
Central Plan Outlay 2007-08
Plan Outlay (Rs. Crore) Percent of GDP Growth Rate
200607
Agriculture 7391
200708
8558
200607
0.18
200708
0.19
2007/200 6
15.79
Rural development
Irrigation and Flood Control Energy Industry and Minerals
18268
462 68825 12588
20342
507 79158 20434
0.44
0.01 1.67 0.31
0.44
0.01 1.73 0.45
11.35
9.74 15.01 62.33
Transport
Communications Science, Technology and Environment General Economic Services Social services General Services Grand Total
49819
17851
71589
25812
1.21
0.43
1.57
0.56
43.70
44.60
6774
2566 59143 542
8816
3632 80315 829
0.16
0.06 1.44 0.01 5.93
0.19
0.08 1.76 0.02 7.00
30.14
41.54 35.80 52.95 31.02
24422 9
31999 2
Tax Reforms
Trends in tax revenue (Table: Graph). Desirable features:
Selectivity in tax policy: Retrograde policy in the Cement sector. Undesirable Features:
Reduction in customs; Dividend tax; Withdrawal of exemptions under MAT under Sections 10 A and 10 B. Extension of the tax to ESOP.
Centre has to take leadership in GST; Need to finalise the Roadmap. Need to broaden the base, reduce the rate and minimise rate differentiation
Reforms do not advance GST reform. Reduction in CST too little; Amendment of definition of small scale industry; Selectivity in excise and customs: The special treatment of biscuits, food mixes, umbrella, parts of footwear, plywood, water purification devices and cement. Continued selectivity in service taxation; Missed an opportunity to convert the central excise into a MANVAT on goods and services.
Trends in Tax revenue (Per cent of GDP)
Tax heads
2001- 2005- 2006- 200702 06 07 08 3.03
1.60
Growth rate 2006/2001 26.69
31.38
Direct Taxes
Corporate Tax
4.63
2.84
5.57
3.56
5.85
3.68
Personal Income Tax Other Direct Taxes
Indirect Taxes Customs Duties
1.40
0.03 5.17 1.77
1.78
0.01 5.63 1.82
2.00
0.01 5.79 1.99
2.16
0.01 6.14 2.16
20.57
6.10 15.05 14.80
Excise Duties Service Tax Total-Gross Tax Revenue
3.18 0.14
3.12 0.65
2.85 0.93
2.85 1.10
10.18 67.19
19.87
8.20 10.26 11.36 11.98
Trends in Tax Revenue
4.00 3.50
Per cent of GDP
3.00 2.50 2.00 1.50 1.00 0.50 0.00
1 -0 00 20 2 -0 01 20 3 -0 02 20 4 -0 03 20 5 -0 04 20 6 -0 05 20 7 -0 06 20 8 -0 07 20
Corporate Personal Customs Excise Service Tax
Years
Trends in Direct and Indirect Tax Revnue
14.00 12.00
Per Cent of GDP
10.00 8.00 6.00 4.00 2.00 0.00
20 00 -01 20 01 -02 20 02 -03 20 03 -04 20 04 -05 20 05 -06 20 06 -07 20 07 -08
Direct Indirect Total-Gross
Years
Concluding Remarks
Not much to further reforms in the budget. Achieving fiscal targets is important – but there are questions on achieving RD targets. Has led to significant improvement in state finances. Will the states take advantage? Budget – Advancing NCMP more than Growth. Focus on agriculture - rhetoric and reality. Selectivity in discretion in tax policy – not much to advance GST reform.