The finance minister has at last pickedup the thread that had underpinned the 1999 budget. He has resisted thetemptations of trying to jack up revenues through rate hiking. Rather, hehas bet that lowering direct tax rates will do more for boosting revenuecollections, than squeezing the honest assessee through backdoor ratehikes-like surcharges -which he has abolished barring the 2 per centnational calamity surcharge. Similarly, he has simplified the excise dutystructure and lowered the peak rate from 40 to 32 per cent. He hasreaffirmed the government's programme for energetically pursuingreforms-including privatisation, changes in labour laws and phasing out thecolossal inefficiencies in the subsidy schemes for fertiliser, sugar andfoodgrain. In many ways he has chosen to take head-on, the very issues, onwhich of late, some politicians from both the ruling alliance and the mainopposition party had turned rather coy.In doing this, the finance minister has deliberately sought to confrontthose who have chosen to adopt a policy of eroding the credibility of thereform agenda, without necessarily presenting any alternative platform forgrowth and equity. Policy-making is all about creating a system ofincentives that make economic agents turn in their best in the market. Thefinance minister has correctly bet that the myriad economic agents in thiscountry who deliver economic growth, would welcome better incentives, ratherthan the belaboured self-righteousness which unfortunately passes forpolitical virtue today.
Does the finance minister run the risk of his numbers not adding up? Are therevenue projections overly optimistic, given the reduction in the marginalrates of direct taxes? I would suggest that the answer is in the negative.
For 2001-02, the budget has projected an increase in corporation and incometax collections of 14 and 15 per cent, respectively, far more modest thanwhat had been achieved in the last few years (average 25 per cent). Inchoosing to opt for a lower projected rate of direct tax collections, he hasreflected considerable pragmatism.
Growth in direct tax collections have slowed since December 2000, and anyoptimistic revenue projection would have run the big risk of falling short,while additional counterpart expenditures that would surely have beencommitted would not have obliged by taking a back seat. That is the otherdefining feature of this year's budget-an appreciation of the merits ofrestraint. A lack of excessive ambition makes for good policy in the worldof finance-a fact well appreciated by business -big and small-as well as thehouseholder who plans his expenditure according to his means. Only thepolitical class appears to have great difficulty in digesting the fact thatthe immutable rule of prudence is the great leveller. It lays waste poorlyrun businesses and the improvident householder, alike. Sovereign governmentsare advised not to believe otherwise.
When politicians demonstrate restraint, they can also show the other virtue-that of a coherent argument. Budget 2001 is a coherent document, ablyknitting its clearly stated objectives articulated at the beginning offinance minister's speech, to drawing the boundary lines of reasonablycertain revenue expectations, fitting the expenditure within its ambit, andshooting for a small reduction in the fiscal deficit-as a proportion of GDP.
The individual instruments of revenue and expenditure that have been optedfor, fits well with the overall approach. The scope for discretion has beenfurther diluted and government has pushed for a more rule bound andtransparent system.
Underscored in red-though that might be an inappropriate hue-is therealisation that the government can best serve economic growth by notcontinuing in the command and control mode, even in a diminished form. That,private economic agents maximise growth when the incentives are right; that,government's commercial enterprises should be run by the rules of commerce,and not of politics. That, when government substitutes itself for themarket, there is a cost to be paid through loss of potential growth. That,while there are instances where government needs to intervene in the marketeven at the cost of growth, this power is best exercised with greatrestraint.
Government has in budget 2001 placed its faith in the enterprise of itscitizens - providing them with the incentive for profitable endeavour on theone hand, while on the other, it has committed what incremental expenditureit can afford to infrastructure and the social sector. Under thecircumstances, where the western economies are slowing, and government'sfiscal needs pre-empt three-quarters of domestic savings, where much thatneeds to be done in institutional reform remains undone, the financeminister could hardly have done any better.
(The writer is Economic Advisor, ICRA Ltd.)
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
