The United Progressive Alliance (UPA) came to power on the promise of helping the aam aadmi (common man). Union Budget 2007-08 has observed the promise in the breach, for the common man has not only got no respite from the UPA Government but his plight will surely worsen. The reason: the biggest problem concerning the country'spublic finance is zooming expenditure; and Finance Minister P. Chidambaram has done little to check fiscal profligacy.
Let'sus begin with the little relief he gave to income-tax payers. He scaled up the threshold limit by Rs 10,000. The new threshold limit for women will be Rs 1,45,000 and for senior citizens Rs 1,95,000. Since tax slabs have not been changed, the incidence on income-tax payers remain almost the same. According to an expert study, the 30 per cent tax rate, which is the highest slab, applies over an annual income of Rs 1.5 lakh. In China, the 30 per cent tax rate applies only to income above Rs 40 lakh.
The least the aam aadmi would have expected was some substantive changes in the tax slabs. The Finance Minister need not have increased the maximum slab for people earning Rs 40 lakh a year, but it could surely have gone up by a few lakh rupees.
Now, income-tax payers should give up hope of any upward revision in the slabs, for if Chidambaram could not do this at a time of revenue buoyancy he is unlikely to do this in the future. In his Budget speech, he said, ?Revenues are buoyant for the third year in succession. We have garnered additional revenues and? I have put these revenues to good use to promote inclusive growth, equity and social justice.? Apparently, the buoyancy of revenues is meant to embellish the government'sfiscal performance, not to benefit the common man. And inclusive growth and equity are certainly empty slogans, as far as the lower income group middle class people are concerned.
Even the slight relief by way of increasing the threshold limit will be partially offset by the hike in the rate of education cess, from 2 per cent to 3 per cent. What is more dangerous about this cess is that it has a cascading effect on the prices of all goods and services, as it is levied on all major taxes.
At a time when people are groaning because of the soaring prices, it is certainly not a good idea to boost anything that is inflationary in nature. But then the government'sexpenditure is growing at an alarming pace; and the finance minister is desperate to find resources to meet the spending.
So, he also expanded the scope of the fringe benefit tax (FBT). It may be recalled that businessmen expressed their unhappiness over the FBT when it was levied by Chidambaram-not because of its impact on their bottom-line but because of the procedural rigors involved in the payment of this tax. For the small and medium enterprises, the FBT is a real pain. Instead of making their lives easier, he has imposed 30 per cent FBT on the gains accruing on Esops.
To be fair, the finance minister alone should not be blamed for the mess the Budget is; the real culprit is the skyrocketing expenditure, which is mainly due to the government'spopulism. For the current fiscal, total expenditure is estimated to be Rs 5,81,637 crore, which is much higher than Rs 5,06,123 crore in 2005-06. In fact, it has crossed the budgetary estimate for this fiscal of Rs 5,63,991 crore. For 2007-08, total expenditure will further go up to Rs 6,80,521 crore.
Unfortunately, the UPA Government is unwilling to address the problem of a spend thrift polity. Unmindful of their strain on the public exchequer, Chidambaram announced one populist scheme after the other in his speech in Parliament. He claims to have adhered to the Fiscal Responsibility & Budget Management Act, 2003. ?So far as the Central Government is concerned, the fiscal consolidation is proceeding according to the FRBM Act. Based on Revised Estimates, I am happy to report that the revenue deficit for the current year will be 2.0 per cent (against a BE of 2.1 per cent) and the fiscal deficit will be 3.7 per cent (against a BE of 3.8 per cent).?
But this claim of fiscal responsibility is phony, for it was the high GDP rather than sound management of government finances that is responsible for the low fiscal and revenue deficits. If the economy unexpectedly slows down, the GDP figures for the next fiscal will look pretty bad.
Chidambaram'sclaim to bring down inflation using fiscal means also lacks any merit. For example, the differential excise slabs that he announced for the cement sector is not only an unnecessary state meddling in economy but is likely to have the opposite effect. Already industry insiders and analysts have started talking about an upward revision in cement prices. Its indirect effect will hurt the booming sectors like realty. And, of course, the aam aadmi will not like it.
The only way inflation can be brought under control is by reducing government expenditure, which would lead to lower taxes. Price controls are the worst way to check inflation. We have some bad memories of such controls in the dark ages of socialism. But even in advanced countries, price controls have proved futile. As Ben Lieberman, senior policy analyst at the US-based Heritage Foundation, wrote sometime ago, ?The United States has tried oil and gasoline price controls before, when the federal government implemented them in the 1970s, and they were an unmitigated disaster. In fact, the attempts by Washington to force down prices during that decade backfired so badly?resulting in shortages and gas lines?that they should have served as a permanent cautionary tale. Policymakers should leave the market to do what it does best: allocate limited resources to their most valuable uses.?
In short, Chidambaram got it all wrong. Instead of addressing the greatest issue of public finance?that is, the galloping government expenditure?he has done a little tinkering with tax rates and introduced remedies that are worse than the maladies.
(The author works with The Political and Business Daily.)