Large-sized budget raises question of implementation

The proposed large-sized budget for the next fiscal, with 20 percent growth in the overall outlay and 35 percent in development spending, immediately raises a question regarding the government's implementation capability. What factors have dictated such a large increase in the projected budgetary spending? Boosting public spending may be thought to be one way of helping the economy recover from its current slowdown. Besides, the allocations for politically-mandated projects as well as for the safety-net programmes for the poor may also have contributed to the bloating of the ADP. Revenue expenditure is also projected to rise significantly to meet the costs of increased salaries, agricultural and fuel subsidies, and debt servicing. On the revenue side, the Finance Minister may have gone for optimistic projections encouraged by the fact that the revenue target in the current fiscal has been achieved in spite of stagnation in import trade.
The proposed budget shows the continuation of two recent structural changes in the budget. First, total revenue earnings have been increased by mobilising more revenue from domestic sources, while the dependence on import taxes has been reduced. This is a positive change.
The second structural change is, however, a matter of concern. Even with an ambitious target for the size of ADP, development spending will be less than 30 percent of projected total budget outlay. This proportion is only 26 percent in the revised budget of the current fiscal. There was a significant contraction in development spending during the tenure of the last caretaker government. Previously, since the early nineties up to the recent period, development spending accounted for an annual average share of more than 40 percent out of total budget expenditure.
Undoubtedly, the implementation of the proposed ADP will require making development administration much more pro-active and dynamic and less corrupt. The substantial allocations for investments under so-called public-private partnership have remained unutilized. Fund provisions have been made for this purpose in the proposed budget as well. Moreover, the energy and power sector has been allocated funds on a priority basis for understandable reason. Past experience, however, suggests that without significant improvement in the quality of economic management, mere allocations of funds on paper are unlikely to yield results.
The Finance Minister has rightly pointed out that the proposed budget for the next fiscal has an added significance, being the first budget under the proposed Sixth Five Year Plan. It took the last two decades to raise the country's average annual GDP growth from 4 percent to 6 percent. The GDP growth target for the Sixth Plan is likely to be set at 8 percent annually. This represents huge growth acceleration. The proposed budget hardly gives indications of any such fundamental policy initiatives that could help to lift the economy to a higher growth trajectory. Instead, the Finance Minister's immediate concern seems to be to help the economy to recover from the current slowdown caused by the global recession. And that may be a pragmatic approach as well.
The budget does not propose any wide-ranging change in the duty structure. Such an approach is conducive to maintaining continuity in the industrial policy and the structure of producer incentive. The so-called regulatory tax on the import of certain finished items introduced last year will continue during the coming fiscal. Additional import taxes have been proposed on certain items including cars and sugar. The economic rationale behind increased import taxes needs to be clearly understood. The policy of raising more revenue by imposing higher taxes on the import of luxury items is in conformity with the equity principle of taxation. However, if the purpose is to provide higher protection to domestic production, there should be demonstrated justification for such increased protection. In particular, differential rates of tax at the finished and semi-finished stages of an import item may sometimes lead to exorbitant protection in relation to local value-added. Whether there are such anomalies in the industrial incentive structure created by existing import duties needs to be scrutinised.
The proposed widening of the VAT net is justified on ground of strengthening revenue mobilisation from domestic sources. However, the economic rationale of proposing a tax on the export of tobacco is unclear. Every country has its own policy for taxing tobacco products to discourage consumption. This is not a matter of trade policy.