The striking thing about the Budget for 2008-09, unveiled on Friday, is the sharp surge in tax revenue that is postulated, along with tight control on expenses. Are these numbers for real? The expenditure numbers are easier to explain, because the current year's figure includes a one-time outlay for acquiring shares of the State Bank of India from the Reserve Bank. Adjust for this Rs 40,000 crore and the expenditure numbers look more credible. The bigger questions have to do with the revenue projections. | |
| Mr Chidambaram hopes to get 17 per cent more from the income tax, after giving away substantial sums through raising the tax slabs. If 32 million tax payers get the minimum benefit of Rs 4,000 mentioned by the finance minister, the tax giveaway is Rs 12,800 crore. But the total benefit available goes up to Rs 45,000. Even if one were to assume an average benefit of no more than Rs 8,000 per tax payer, the tax giveaway reaches Rs 25,600 crore. Add that to the revenue increase budgeted, and the total increase expected works out to roughly the 40 per cent seen in the past two years "" which would seem adventurous to some. The finance minister argues that such "arithmetical" calculations are not the way to treat the numbers. His expectation is that the spacing out of the tax slabs will encourage much greater tax compliance "" especially in the Rs 2 lakh to Rs 5 lakh income range. This ties in with work done by the economist Surjit Bhalla, published in Business Standard, which shows that the lowest rate of tax compliance is in the Rs 2 lakh-Rs 5 lakh income range. The finance minister has obviously bought the argument, and assumed a sharply improved rate of compliance. |
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| As for corporation tax revenue, budgeted to increase by 22 per cent, the worry must be that growth in corporate tax profits has slowed down in recent quarters. If the slowdown continues, it may prove tough to achieve much higher growth rates in corporation tax revenue "" except that the finance minister does not seem to be budgeting for a slowdown. The GDP growth assessment for next year, put out by officials, is 8.5 per cent, while the finance minister in an interview has argued that no one should rule out even 9 per cent. Considering that GDP growth in the latest quarter (October-December) is only 8.4 per cent, this seems optimistic. Perhaps the finance minister thinks he has proved the revenue sceptics wrong in recent Budgets, and can do so again. |
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| The other point about assuming robust economic growth is that the excise and customs revenue assumptions are fairly modest "" but then the revenue increase under these heads has been modest for some time. The single-digit growth rate in excise revenue, in particular, seems to be a problem that defies solution. By way of contrast, revenue from the service tax is expected to continue growing sharply (by about 28 per cent next year). |
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| The bottom line numbers are the deficit figures. It is encouraging that the primary deficit (on revenue account, before interest payments) has been replaced by a surplus, and has grown now to 1.1 per cent of GDP. The absolute levels of both the revenue (including interest) and over-all fiscal deficits have also fallen, and not just in relation to GDP. Indeed, even after paying out whatever the Pay Commission gives to government employees, and accounting for the bank loan waiver over three years, the fiscal deficit next year (as shown in the Budget) will stay within the 3 per cent limit stipulated under the fiscal responsibility law. |
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