ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Budget Thunder-for Real?

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Ever since he assumed office for the third time as the country’s finance minister last October, Yashwant Sinha has been talking of ‘hard choices’ for the country. With the union budget day drawing near, all the talk of hard decisions will very soon be put to test.

Warnings about limited options and hard decisions are the common refrain of finance ministers on the eve of the presentation of the annual budget. Only, this time the talk has been a bit more shrill, understandably because the fiscal situation permits little room for manoeuvre except through strong measures to either cut government expenditures or raise revenue or do both. With the centre’s fiscal deficit set to touch 5.5 per cent of GDP and that of the states crossing 4 per cent, the state of government finances is almost back to what it was at the time the balance of payments crisis surfaced in 1991. Going by the past record, however, rarely do budgets live up to the thunder that precedes their presentation. From the outset, Manmohan Singh’s budget of July 1991 (and the ones that followed) did little to correct the unsustainable fiscal gap by way of raising the tax ratio or cutting current expenditures in a manner that would make a real difference. No doubt some expenditure compression did take place but that came about more through the easier route, viz, a severe squeeze on the government’s capital outlay, thereby starving critical infrastructure sectors of investment, an action that Manmohan Singh came to rue publicly later. That was a time when the country could have been made to accept harsh measures, such as a temporary cap on the allowances and perks of government employees, a special levy to tide over the crisis or a hike in user charges for publicly provided goods and services. Nothing of the kind actually happened, however. True, there was some cut-back in subsidies, some of which came to stay but a good bit of which was given back. On the revenue side, the country was taken through a programme of fairly extensive tax reform, primarily to bring the tax system into alignment with the new environment of a liberalised economic regime. That yielded some positive results. The share of direct taxes in the centre’s tax mix went up significantly, though the tax ratio suffered a decline. While there was some pick-up subsequently, the peak reached in the 1980s has not been seen again. The pre-budget thunder instead has generally ended in a whimper. This is not altogether surprising as our finance ministers have been wont to plump for ‘dream budgets’ to keep on the right side of the articulate classes, no matter what happens to the fiscal deficits in the end. Will it be any different this time?

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