Budget 200708

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Budget 2007-08

• M. Govinda Rao
• Director, National Institute of Public Finance
  and Policy.
• Member, Economic Advisory Council to the Prime
  Minister

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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
• 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.
• To what extent can the budget achieve the tasks
  it has set out?

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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?

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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

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Note n negligible. Source Budget Documents of
the central government (various years).
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How Has the Adjustment Come About?
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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.

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Tax Reforms

• Trends in tax revenue (Table Graph).
• Desirable features
• Reduction in customs
• Dividend tax
• Withdrawal of exemptions under MAT under Sections
  10 A and 10 B.
• Extension of the tax to ESOP.
• Selectivity in tax policy Retrograde policy in
  the Cement sector.
• Undesirable Features
• 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.
• Centre has to take leadership in GST Need to
  finalise the Roadmap.
• Need to broaden the base, reduce the rate and
  minimise rate differentiation

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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.