Honestly, one could not have asked for a more sensible Budget.
Budget 2005-06 is technocratic excellence at its best, and given the constraints on Mr Chidambaram -- the legacy of a dream Budget from 1997-98, and the so-called pressures from the Left -- no matter how much political correctness Mr Chidambaram wanted to achieve, he would have run afoul of someone or the other.
This Budget is trend-setting in that second-generation reforms will be benchmarked against it. Compulsions of globalisation make it difficult to be less than transparent. Demands of equity mean greater expenditure for equity.
But such expenditures have more often than not entered a black hole. It is in this regard that the commitment to not only examine outlays but also supervise outcomes is most welcome. "I must caution that outlays do not necessarily mean outcomes. The people of the country are concerned with outcomes."
Of course, not much is expected this year, but each subsequent year, it will become more and more difficult to ask for more money for "mother's milk" type of programmes without documenting that such milk will not be contaminated by corruption, leakage, and plain inefficiency.
This tentative commitment to examining expenditures is the legacy of Rajiv Gandhi, who first warned, and enlightened, us about the sad reality that less than 15 paise of every rupee of expenditures actually reached the intended poor beneficiaries. The smugness of the moral brigade -- spend as long as the stated purpose is good -- will be arrested.
Another quote in this regard is noteworthy: "We shall also ensure that programmmes and schemes are not allowed to continue indefinitely from one Plan period to the next without an independent and in-depth evaluation. Civil society should also engage the government in a healthy debate on the efficiency of the delivery mechanism".
I would only add that it should not be axiomatic that the government financing of public and merit goods should also mean the production of these goods by the government itself. This is too much corruption by the government, of the government.
Now to sense and sensibility. Dream Budgets represent structural change, and second-generation reforms cannot be earth-shaking. So if you get good common sense (which as some wag said long ago is least common) you actually are in receipt of a dream budget, mach II.
There is a solid expansion of tax reforms invented by PC himself in 1997-98. Mr Chidambaram was brave when he darted into uncharted territory with a steep tax cut in personal income taxes in 1997-98; shocking as it might appear to some, this year's tax cut is almost as deep! And deep also for the "missing middle", the reluctant Indian tax filer.
For someone earning Rs 4 lakh, and investing only Rs 60,000 of the Rs 1 lakh permissible in government securities, etc. the effective tax rate today will be only 13 per cent, down sharply from the effective tax rate of 19 per cent of yesterday.
In addition, there are clear signals of the dawn of the new era of market-determined interest rates. As someone who has quixotically dreamt of such an occurrence for at least the last eight years, this would be welcome news.
Even NGOs can now borrow from abroad, and domestic deposit rates, and lending rates, will decline. Sayonara, small savings.
Wait a minute -- did Mr Chidambaram pull off a perfect 10? No, but if he had also been bolder on corporate tax reform, he would have!
The corporate tax rate has been reduced from 35 to 30 per cent, and depreciation allowance sensibly reduced from 25 to 15 per cent. However, the surcharge has been increased from 2.5 per cent to 10 per cent, for which there was little need.
Another presumed "problem" identified by the media at Mr Chidambaram's press conference is the tax (0.1 per cent) on same-day same-account cash withdrawals of more than Rs 10,000. As the finance minister correctly emphasised, the upwards of Rs 10 tax is really too small to be concerned about -- one often pays more for home delivery, or for use of ATM machines.
The objective for this tax is to help identify a trail for possible black money, and in this regard, the goal is laudable and the instrument is not that problematic.
I personally feel that the sum total of the 1997-98, 2004-05 and 2005-06 income tax reforms (sensible tax rates, low capital gains tax, etc.) are doing much more to curtail the generation of black money than any tax on cash withdrawals from banks can or will do.
If outlays are being measured against outcomes, and tax revenue is being generated sensibly, this should be good news for the reduction of the fiscal deficit. It is, but its true impact will be felt a few years hence.
The tax base is being expanded and this year (2004-05) should see the tax-GDP ratio hitting a historical high of 16 per cent, a level approximated in 1989-90. This has been accomplished with a drastic reduction in indirect tax rates and revenue.
Excise and customs taxes accounted for about 80 per cent of total tax revenue in he early nineties -- today this share is approximating 55 per cent. The share of direct taxes has more than doubled -- up to 45 per cent from less than 20 in 1990-91.
Note to the moral brigade -- this has been accompanied by an expansion of the tax base, and decline in tax rates.
India has been breaking, and now has fully broken, from its deficient past. The gaddi has left the station. The Indian economy is on a roll, and the government can do little to stop the momentum. What the government can, and should, do is to facilitate, and smooth out, the acceleration.
This is what the 2005-06 Budget is attempting to do. In my opinion, it will succeed. How do I know that? Because of nuggets in his speech.
In a passage about economic policies in India and China, Mr Chidambaram points out that China received $60 billion of FDI in 2004 alone. What can India learn from our fierce competitor? He pleads: "On foreign direct investment, I would urge Hon'ble members to take a pragmatic view." Sensible, very sensible.
The author is MD, Oxus Research & Investments.
