I like pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals.” That’s Winston Churchill. On the face of it, the finance minister has done a remarkable job and hasn’t pressed the pause button on fiscal consolidation. The Fiscal Responsibility and Budget Management Act requires 3 per cent fiscal deficit (as share of GDP) and 0 per cent revenue deficit in 2008-09. Revised estimates (RE) figures in 2006-07 are marginally better than budget estimates (BE) figures. More importantly, 2007-08 promises a 3.3 per cent fiscal deficit and 1.5 per cent revenue deficit target. At this rate, we should reach the 2008-09 targets, at least on fiscal deficit. The revenue deficit target won’t be reached before 2010-11. Comparing BE 2007-08 with RE 2006-07, total expenditure increases by Rs 98,884 crore, revenue expenditure increasing by Rs 51,133 crore and capital expenditure by Rs 47,751 crore. But tax revenue (net to Centre) only increases by Rs 57,901 crore. Where’s the rest of the money coming from, since borrowings and other liabilities decline a little? Rs 40,000 crore is from sale of SBI stake. Had that not been there, the fiscal deficit would have been 4.2, not 3.3 per cent. At one level, this is certainly sleight of hand.

Within gross tax revenue, excise increases by a modest 11.04 per cent, customs by 20.75 per cent, corporation tax by 14.95 per cent, income tax by 19.71 per cent and service tax by 31.52 per cent. Barring service tax, there isn’t any great tax generating effort. If one were to extrapolate finance ministry’s 2004-05 revenue forgone estimates to 2007-08, the tax/GDP ratio could have been 17 per cent instead of 11.4 per cent this time. However, that requires removal of concessions and exemptions. True, all exemptions can’t be scrapped. Customs duty waivers linked to exports will remain, as will SEZ policy. Given NCMP (National Consensus on Muddled Policies), no one should have expected big bang liberalisation. But one legitimately expected tax reforms, characterised by removal of concessions and exemptions. After all, by Chidambaram’s own admission, effective tax rate for the corporate sector is only 19.2 per cent. The answer doesn’t lie in extending Minimum Alternate Tax to the IT sector, but in wholesale removal of discretion. As the three Vijay Kelkar reports pointed out, tax policy shouldn’t be used to push investment, growth and employment in backward geographical regions (J&K and Northeast included) or selected sectors. These attempts are arbitrary, distort resource allocation and don’t necessarily promote equity.

... contd.