Vijay Kumar Gaba

This is that time of the year when everyone gets an opportunity to express their wishes to the finance minister. Even though there is no empirical evidence to suggest that the finance minister would oblige even a significant minority of aspirants – not because she does not want to; but simply because she cannot.

Contours of the annual union budget

It is important to note that the finance minister of India is like the CFO of a business corporation. Her job is to keep account of the receipts and expenditure of the government; manage resources necessary for executing the plans approved by the Cabinet; ensure optimum utilization of available resources; and keep adequate provision for meeting the contingencies.

She is accountable to all the stakeholders, insofar as the transparency of accounts is concerned. Her discretion is however limited to choosing the sources of revenue needed for executing the plans of the government. She needs to plan how much resources to raise from (a) taxation; (b) sale of public assets; and (c) borrowing.

Taxation

In taxation, a balance has to be maintained between direct and indirect taxes to keep the incidence of tax just and equitable. However, since a major part of indirect taxes are now either in the domain of GST Council (GST), state legislatures (Excise Duty and Cess), or international agreements (Custom Duties), the union finance minister has very limited role to play in this. This restricts her discretion largely to the direct taxes only. Moreover, since most of the direct taxes have already been rationalized, she would have very limited scope to reduce direct taxes. If anything, she can impose some new taxes or additional cess. The best outcome for taxpayers therefore would be that the finance minister maintains the status quo on taxes.

Sale of public assets

In view of various Supreme Court decisions, legislations, rules and regulations implemented in past couple of decades, the Sale of public assets (mines, airwaves, PSE shares, land etc.) has to meet the criteria of sustainability, development, transparency, viability, socio-political expediency; etc. and depends heavily on the current market conditions.

In the past there has been absolutely no correlation between the asset sale targets announced in the budget and actual realization. Last year the finance minister budgeted aggressive Rs17.75trn from sale of assets. As of today, we have not achieved even half of it.

Borrowing

Borrowing depends on consideration of fiscal discipline, servicing capacity, and market conditions. Historically, we have borrowed from domestic lenders only. However, in recent years the role of foreign lenders has been rising; the exchange rate volatility has therefore become a consideration. The FRBM Act also guides the extent of borrowing.

Budget presentation – mostly a marketing event

The importance, or otherwise, of the annual budget presentation must be seen within this framework. Although the attention that is paid to the annual budget speech has diminished in past decade or so, it still evokes intense interest from the financial market participants. I feel it has more to do with the marketing success of business news channels rather than anything else.

…that raises anticipation and hope

In the run up to the budget presentation, a number of TV shows are hosted to propagate an environment of expectation, hope and fear amongst market participants. The anticipation, that is sometimes far beyond the realm of reality, guides the market volatility.

The representatives of various interest groups and lobbyists for pressure groups expect demand from FM, which she may have no jurisdiction to give. For example, someone asks FM to allocate more money for infrastructure spending. Whereas, this request should logically be made to the concerned ministry and departments, which in turn shall make a plan, and get approved by the cabinet. FM will be obliged to provide resources for a plan approved by the cabinet.

No one wants to yield

Everyone expects a moon from the finance minister, but no one wants to yield anything.

Like every year, the stakeholders are seeking massive investment in infrastructure; fiscal support for MSME; boost to private consumption by leaving more cash in people’s hand (lower taxes); higher spending on healthcare, agriculture, and education; aggressive disinvestment; lower fiscal deficit; stimulus of housing sector; etc. No one is proposing new or higher taxes.

…FM will continue with her trapeze act

The finance ministers have always struggled to maintain a balance between higher social sector spending and fiscal consolidation. That struggle will continue this year also. Regardless of what the finance minister reads in her speech, the allocations to various social sector schemes will see moderate changes only with many schemes getting lower allocations.

The emphasis could be on motivating private sector investment with little fiscal support.

I believe conditions are too fragile to introduce any new taxes like Estate Duty or any material hike in existing tax rates.