PARTY IN PARLIAMENT

Uninspiring Impressions
Yashwant Sinha

The first budget of the UPA Government was presented by the Finance Minister on 8th July, 2004. The presentation of the first budget of any government is a very important occasion because it gives the people an idea of the policies, programmes and the future direction of the new government. The whole world watches the budgets of Government of India with very keen interest because of the growing importance of India globally.

Every budget is presented in a certain economic background. The economic background of this budget has been described in detail in the Economic Survey presented to Parliament by the Finance Minister on 7th July, 2004. In the very first sentence the Economic Survey states "the economy appears to be in a resilient mode in terms of growth, inflation and balance of payments, a combination that offers large scope for consolidation of the growth momentum with continued macro economic stability". In his budget speech the Finance Minister has said "the economic fundamentals appear strong and the balance of payments is robust". Clearly the Finance Minister inherited an economy which was in the pink of health. I can not think of any Finance Minister in recent years who has had this kind of advantage, this kind of elbowroom to frame his economic policies. A longer term view of the economy will confirm this further and also erase the erroneous impression which has been deliberately created by the Congress party and its allies that in the seven years between 1991 and 1997 when Dr. Manmohan Singh and Shri Chidambaram were the Finance Ministers of the country the economy achieved a very high growth rate and when the NDA came to power in March 1998 the economy slowed down. The Economic Survey gives the growth rates of previous years. But I will mention the growth rates of only two years to demonstrate what happened when Shri Chidambaram was the Finance Minister. The growth rate in 1996-97 was 7.8%. It declined to 4.8% in 1997-98. The decline in the growth rate was not merely on account of a decline in the growth rate of the agricultural sector. The industrial sector decline was more substantial because it came down from 7.1% in 1996-97 to 4.3% in 1997-98. Thus, the momentum which had been created in the industrial sector in the earlier years lost its steam by 1997-98. The economy was already on a downward slope. This was the situation that the NDA Government inherited when it came into office in March 1998. Compared to that the UPA Government has inherited an economy which is on the upswing.

The Finance Minister has made some claims in his budget speech and sought to create some impressions. It is very important for us to scrutinize those claims and examine those impressions. I shall do so with the help of the documents the Finance Minister himself has presented to Parliament like the Economic Survey, the budget speech and the other budget documents. I would like to judge him by his own standards, by his own benchmarks.

Right at the beginning of the budget speech the Finance Minister quotes the Prime Minister when he says that the people of India have sought "a change in the manner in which this country is run, a change in national priorities, and a change in the processes and focus of governance". Then the Finance Minister proceeds to announce "I shall make every effort to be true to that mandate". Three paragraphs later he talks about the shortage of time etc. and says "under the circumstances, it was considered optimal to allow the ongoing programmes to continue until the Planning Commission completes an exhaustive review and reorients the expenditure pattern to conform to the NCMP objectives". As far as the taxation side is concerned the Finance Minister says in paragraph 95 of his budget speech "I am a votary of tax reforms but it would be unwise on my part to attempt to do tax reform in a hurried or piecemeal manner. Seven months from now there will be another budget and there will be an occasion to visit the subject of tax reform". Thus, both on the expenditure as well as the taxation side the budget is not supposed to break new ground, take new initiatives or make departures from the past. So much for being true to the mandate supposedly given to this government by the people.

Now let us look at the impressions he has sought to create through this budget and the subsequent statements relating to the budget. The first impression that he has sought to create is that the NDA government neglected the sectors of agriculture, rural development, education, health and employment and that he would set it right through this budget. Let us examine these five sectors in some detail. As far as agriculture is concerned a very important issue is the question of gross capital formation in agriculture. According to the Economic Survey the gross capital formation in agriculture at 1993-94 prices was 1.9% of the GDP. By 1997-98 i.e. before the NDA came to power, it had declined to 1.4% of GDP. Between 1998-99 and 2002-2003 it hovered between 1.3% to 1.4% of GDP. Thus, during the NDA years the declining trend in gross capital formation in the agricultural sector was arrested. It was not allowed to decline any further. Were we able to raise it? According to the Economic Survey "there is indication of a reversal of this trend of late with the public sector investments in agriculture attaining a five year high in 2002-2003". So, we did succeed in reversing the trend of decline in gross capital formation in the agricultural sector.

The other important issue in agriculture is agricultural credit. Agricultural credit stood at about Rs 32,000 crore in 1997-98. It had increased to Rs 80,000 crore by 2003- 04. The Finance Minister has set a target of doubling agricultural credit in three years time. His is a promise. We had doubled it in four years. Ours is actual performance. The NDA government also started the scheme of the Kisan Credit Card. According to the norms which have been set by NABARD there are 4.27 crore farmers in this country who are eligible for Kisan Credit Cards. By the end of March 2004, 4.13 crore farmers had already been issued Kisan Credit Cards involving a total amount of Rs. 98,000 crore. It must be noted that every KCC holder is being provided personal accident insurance cover of Rs. 50,000/- for accidental death and Rs. 25,000/- for permanent disability. So, over 4 crore farmers in this country also enjoy this insurance cover.

Another impression the Finance Minister has created is about making an additional sum of Rs. 8000 crore available through the Rural Infrastructure Development Fund. This is completely untrue. The Rural Infrastructure Development Fund has been in operation for many years and has been going up from year to year. This money, mopped up from the banks which record a shortfall in agricultural lending is placed at the disposal of NABARD to be made available as loan for rural infrastructure development to the State Governments. In February 2004, the then Finance Minister Shri Jaswant Singh brought about a radical shift in this programme and set up a new fund called the Lok Nayak Jai Prakash Narain Fund to meet the needs of agricultural credit and infrastructure development. The total amount of this fund was Rs. 50,000 crore. The allocation for 2004- 05 was Rs. 12,000 crore. The fund was operationalised on 17th February, 2004. The Finance Minister has abolished this fund and revived the RIDF. He has actually reduced the allocation by Rs.4,000 crore and yet takes credit for having made an additional Rs. 8,000 crore available to the agricultural sector. What is even more objectionable is that he has removed the name of Lok Nayak Jai Prakash Narain from this scheme. In its six years in office the NDA government did not change the name of any scheme named after the Nehru-Gandhi family. Lok Nayak Jai Prakash Narain was one of the greatest sons of India. It is unfortunate that the UPA government has acted in this petty manner to remove the name of Lok Nayak Jai Prakash Narain from this scheme.

Similarly, the Finance Minister claims to have provided a sum of Rs. 2,800 crore for the Accelerated Irrigation Benefit Programme in his budget, thus, creating an impression as if a massive sum of money has been provided for the development of irrigation in the country. What he has failed to mention is that this was exactly the allocation in 2003-04 for AIBP . The NDA government had also made many improvements in this scheme and made it more state government friendly.

The Finance Minister has talked of setting up a National Mission on Horticulture. The Economic Survey talks of the new initiatives taken by the NDA government in this sector and says "In recent years there has been considerable emphasis on the development of horticulture and floriculture through the creation of critical infrastructure for cold storage, refrigerated transportation, processing, packing and quality control". There is already a technology mission for the horticultural sector. 3 million tonnes of additional storage capacity has been created during the last five years. I wonder what additional value a national mission will bring to this sector.

I am happy, however, that the Finance Minister has continued the scheme namely the National Agricultural Insurance Scheme and the Farm Income Insurance Scheme, which were started by the NDA government for the benefit of the farmers in this country.

The additional allocation for agriculture and allied activities in Shri Chidambaram's budget is up by only Rs. 136 crore compared to the interim budget presented by Shri Jaswant Singh.

As far as rurual development is concerned the allocation has actually gone down by almost Rs 4,000 crore compared to the RE of 2003-04. There is a special component in the Sampoorna Gramin Rojgar Yojna to deal with natural calamities in the various districts of the country. Floods are already ravaging states like Bihar and Assam. Drought is also knocking on our doors. Every year, therefore, this special component has to be provided for. The Finance Minister has failed to learn a lesson from last year's experience and provide for this amount. The Sampoorna Gramin Rojgar Yojna is an employment generating scheme through a food for work programme. Government godowns are stocked with foodgrains. The country became surplus in foodgrains during the NDA era. We even started exporting foodgrains. So, there is no shortage of foodgrains for food for work programme.

Coming to education, we all know that the Sarva Shiksha Abhiyan was started by the NDA government. The fundamental right to elementary education was inserted in the constitution by the NDA government. Both these along with the mid-day meal scheme have been powerful tools for taking literacy to the children of our country. This government has promised to raise the allocation for education to 6% of the GDP. This will mean an allocation of another Rs. 93,000 crore for education. This can be achieved even in a time frame of five years if annual allocations are raised by Rs.18,000 crore per year. The Finance Minister has also announced a cess of 2% on all taxes for education. According to his own estimate this will be an additionality of between Rs. 4,000 crore to Rs.5,000 crore per year. If the allocation for education does not increase by nearly this amount then clearly the Finance Minister will be guilty of diverting this money to other purposes.

As far as health is concerned, we had started many good programmes when we were in government. This also included the setting up of six institutes like the All India Institute of Medical Sciences. During the year a provision of Rs 60 crore only has been kept under the Pradhanmantri Swasthya Sureksha Yojna for establishment of six AIIMS type hospitals and teaching centers and upgradation of state government hospitals. This may prove to be inadequate. The government has also committed itself to raising the allocation on health to 3% of GDP from the present level of about 1%. This will mean an additional allocation of at least Rs. 62,000 crore or Rs.12,000 crore annually. For education and health therefore, the required funds per year are of the order of Rs. 30,000 crore.

I now come to the most important issue of all namely employment generation. The UPA government has promised to provide legally enforceable employment guarantee through a National Employment Guarantee Act to guarantee 100 days of employment in a year to one able bodied person in every poor household. The Finance Minister has said that his colleague the Labour Minister will bring a legislation for this purpose before Parliament shortly. Surprisingly, however, there is no allocation for this employment guarantee scheme in the budget, an allocation which is likely to run in thousands of crores of rupees.

As far as additional allocations are concerned the Finance Minister has done a very smart thing. He has provided a sum of Rs. 10,000 crore as additional allocation for the annual plan which will go up from Rs.135,000 crore provided for by Shri Jaswant Singh in the interim budget to Rs.145,000 crore in this budget. In paragraph 13 of his budget speech the Finance Minister makes the following statement "While the Planning Commission will make the final allocations, I may assure the House that crucial programmes such as Food for Work, Sarva Shiksha Abhiyan, Midday Cooked-Meal Scheme, basic health care, railway modernization and safety, Accelerated Irrigation Benefit Programme, drinking water, investment in agriculture, Provision of Rural amenities in Urban Areas (PURA), roads, and science and technology, including bio-technology, will receive priority and will be provided with additional funds". Provision of Rural amenities in Urban areas is an interesting typing mistake for provision of Urban amenities in the Rural areas. This Rs. 10,000 crore can only be likened to the magical pot of porridge which can go on supporting all the programmes listed above and others endlessly. So, whether it is a question of additional allocation for agriculture or rural development, education or health, employment guarantee or railway safety or anything else the Finance Minister is bound to say "Rs.10,000 crore hai na, main hoon na". This is clearly unacceptable because it is clearly inadequate.

The cruellest joke has been played with Bihar. Under the head "Special Economic Packages" the Finance Minister states " The NCMP promises that special economic packages for Bihar, Jammu & Kashmir and the North Eastern States, announced in the past, will be implemented expeditiously. Bihar, for example, has a number of projects pending for a long time, including projects in power, roads, drainage and rehabilitation of displaced persons. I would like to assure the House that Bihar will be assisted through the Rashtriya Sam Vikas Yojana. A provision of Rs.3225 crore has been made for the present and, if necessary, this sum will be augmented". The impression that the entire amount of Rs.3225 crore is available for Bihar is erroneous. This is the total allocation for the Rashtriya Sam Vikas Yojna which has many other claimants to this fund. How much will Bihar get therefore, remains to be seen. The Rashtriya Sam Vikas Yojna was created by us in order to specially help the most backward states and districts in our country. What is to be noted is that under this scheme an amount of Rs.2531.35 crore had already been allocated to Bihar during the NDA government's time and more had been promised. The Chief Minister of Bihar in a meeting held in the Planning Commission on 28th August, 2002 complimented the Planning Commision for this generosity and expressed her happiness at this development. Shri Chidambaram has once again claimed credit for a thing already done by the NDA government. The important issue in Bihar, however, is not so much the availability of funds as the capacity of the state government to spend those funds.

I shall now deal with some of his taxation proposals. The transaction tax was clearly not properly examined and was imposed without careful thought. The manner in which the Finance Minister has been forced to roll back and amend this proposal clearly shows how ill advised he was in the first instance. Similarly, the proposal for tax rebate on income of up to Rs.1 lakh is equally half-baked. The impact of this proposal will be that people earning upto Rs. 1 lakh in a year will pay no tax while those with an income of Rs.1,01,000/- will have to pay over Rs.9,000/- as tax. Thus, the post tax income of a higher income group will be less than the post tax income of a lower income group. This is against all canons of taxation. A more honest approach would have been for the Finance Minister to raise the exemption limit from Rs.50,000/- to Rs.1 lakh and distribute the benefit more equitably.

In paragraph 102 of his budget speech the Finance Minister has stated "honourable members are aware that I abolished the gift tax in 1997". When I raised this issue in the House Shri Chidambaram said that he accepted his mistake, that actually I had abolished the gift tax in my budget of 1998-99 and then went on to say "I accept the printing mistake". When I told him that it could not have been a printing mistake he said that he had corrected it but the correction was not carried out. Should the Finance Minister have waited for me to raise the issue in Rajya Sabha on 19th July, 2004 and then accepted his mistake or he should have corrected it on his own between 8th July and 19th July, 2004? It must also be noted that the Finance Bill is very dangerously worded with regard to the change that he has bought about as far as gift tax is concerned. In the budget speech he says that his intention is to tax any sum above Rs.25,000/- purported to be a gift from unrelated persons. The Finance Bill also talks of "any sum". Will this include loans, repayment of loans, consideration for immoveable assets etc.? The issue has been left hanging.

In his budget speech of 1997-98 Shri Chidambaram had said in paragraph 105 "taxing financial intermediation goes contrary to the principle of sound public finance". Yet he has imposed a service tax of 10% on a whole host of financial services namely lending, issue of pay order, demand draft, cheque, letter of credit, bill of exchange, bank guarantee, overdraft facilities, bill discounting facilities, safe deposit lockers, safe vaults and operation of bank accounts. Thus, both lending as well as operation of bank accounts will be subject to service tax. He has violated the very noble principle he himself had enunciated in 1997.

The Finance Minister has also taken recourse to a lot of tokenism in the budget. He talks of a massive scheme of restoring water bodies in the country. The allocation is only Rs.100 crore. He claims to revamp the public distribution system in the country by introducing the system of food stamps but this will be confined to only 2 to 3 contiguous districts in the country. He talks about the scourge of floods in the country and makes an allocation of Rs.30 crore. He talks about the new government's new policy on public sector enterprises and announces that in 2004-05 the government will provide equity support of Rs.14194 crore and loans of Rs.2132 crore to Central PSEs including Railways. But what he forgets to mention is that the amount was more or less the same even last year.

Now let us look at the overall figures of expenditure and receipt in this budget. On the non-plan side the expenditure is actually showing a decline of 5.94%. This could be on account of the debt-swap scheme for the state governments. This scheme has been in operation for two years and surely the Finance Minister could have anticipated the amount of expenditure and receipt under this head. He will have to do it in the course of the year. But more importantly, he has under-funded this budget. My calculation shows that there will be an additional expenditure of at least Rs.13,000 crore under Sampoorna Gramin Rojgar Yojna, the Delhi Metro, Fertiliser subsidy, food subsidy and petroleum subsidy. Similarly, on the revenue side the Finance Minister expects corporation tax to grow by 40% and income tax to grow by 25%. Overall tax revenue is suppose to record a growth rate of 25% this year as against a trend growth rate of 10.5% over the last seven years. According to my estimate, revenue receipts have thus been over calculated by at least Rs 16,000 crore. Fiscal deficit, therefore, is bound to go up by 1% of GDP. But while I am concerned at the fudging of figures and other weaknesses of the budget my real worries lie elsewhere.

Inflation is rising. According to the latest figures, point to point inflation stood at 6.16%. There are many elements in this budget which are inflationary. They have not yet been factored in the figures of inflation. There are serious doubts already about the performance of the monsoon. Rising inflation is bound to put pressure on interest rates. Interest rates have also started rising globally. This does not auger well for the health of the economy. During the NDA rule we had deliberately followed a policy of low inflation and soft interest rates. That policy has had its beneficial impact on the economy as a whole and helped make it more competitive globally. It will be sad if this trend is reversed and we relapse into the earlier situation of high inflation and high interest rates.

The greatest contribution of the NDA government was to make the Indian economy secure, secure from internal as well as external crises. It was thus, that we could weather the East Asian crisis, the post Pokhran economic sanctions, the Kargil conflict, the Orissa super cyclone, the Gujarat earthquake, four years of drought including the unprecedented drought of 2002-03, the increase in global petroleum prices, the terrorist attack in India and in the US and elsewhere, the Gulf war and the generally depressed globally economic situation during these years. It is the duty of the UPA government to at least maintain that record. The first budget of the UPA government unfortunately does not inspire that confidence.