Reading between Budget speech lines

Saying “Chidambaram walks a responsible path”. “Shows boldness” “Votes for growth” and within 12 hours of the heavily ornamented budget speech and relying only on it, sections of media had rated the budget 7/10 for fiscal discipline and boosting investment, 6/10 for containing inflation, 8/10 for not being populist and over all 7/10.

The Finance Ministry put up the voluminous budget documents on the web so late in the night on February 28, 2013, that the media could not even have looked at them before commenting on the Budget. The increasing tendency to comment or rate the budget relying only on the Finance Minister's speech without looking at the details is distorting the quality of Budget discourse. Worse still, live telecast is changing the character of Budget speeches into pamphleteering. They are increasingly becoming a mode of direct public address to crores of voters.

The Budget speeches tend to exaggerate the merits in Budgets and conceal the dark areas in them. The media too ends up doing pretty much the same. This trend has been deepening with every budget. Therefore, the Budget speeches of Finance Ministers have to be interrogated first to find out whether they have rationed the truth in it. Let us interrogate the current Budget speech of the finance minister. On just one issue.

In para 122 of his speech the Finance Minister says that the current tax-to-GDP ratios of 5.5 per cent for direct taxes and 4.4 per cent for indirect taxes, among the lowest for a large developing country, are inadequate to mobilise resources for inclusive and sustainable development. He also contrasts the low ratios with the high tax-GDP ratio of 11.9 per cent for 2007-08 when he was the Finance Minister – of course without highlighting it.

TOO MANY GIVEAWAYS

Did the tax-to-GDP ratio fall from 11.9 per cent to 9.9 per cent fortuitously? No. It happened by design. Annexure 12 of the Receipt Budget almost says so. Read on. When Chidambaram was finance minister from May 2004 to Nov 2008, everything was going right for the world and India. With GDP growth in that period averaging over 9 per cent, the national economy was booming. Annexure 12 of the Receipt budget brings out the shocking fact that when the economy was booming, the Finance Minister, instead of cutting, increased the tax giveaways from from Rs 1.59 lakh crore in 2004-05 to Rs 2.85 lakh crores in 2007-08 – a rise of Rs 1.29 lakh crore or 79 per cent. This was when Annexure 12 was warning the government not to do it. During the three years, the corporate profits zoomed from 11 per cent of the GDP to 14.3 per cent of the GDP – jumping from Rs 4 lakh crore to over Rs 7 lakh crore. And the inflation was sub-5 per cent except in 2006-07 (6.9 per cent).

The combination of high business profits and low inflation is ideal for withdrawing the giveaways to augment revenue. That was the time to strengthen government finances to face the harder side of the cycle as later it had to. But that was when government gave up more taxes to fatten corporates. The share of customs and excise duties, instead of rising, dropped from 4.84 per cent of GDP in 2005-06 to 4.58 per cent of GDP in 2007-08. So the interrogation reveals that, when the Finance Minister claims that the tax-to-GDP ratio was highest in 2007-08, that was still far less than the full revenue potential of the economy. A 50 per cent cut in tax giveaways in 2007-08 would have wiped out the entire fiscal deficit of Rs 1.27 lakh crore.

As the global meltdown began to hit India in mid 2008-09, Chidambaram became Home Minister. His successor Pranab Mukherjee offered a huge stimulus, huge additional excise and customs giveaways, 'to avoid contagion downturn in the economy'. And the customs-excise-to-GDP ratio tumbled in just one year (2009-10) from 4.58 per cent to 3.88 per cent. Since then it has been only sliding, hitting an all time low of 3.22 per cent in this Budget.

These additional giveaways from 2008-09 have caused a tax expenditure of Rs 7.5 lakh crore between 2009-10 to 2013-14. The stimulus was intended to promote consumption and to revive the economy – not to add to corporate profits. In this period of downturn, corporate profits did fall in 2008-09. But it did rise immediately from 11.9 per cent of GDP in 2008-09 to 12.7 per cent in 2009-10, and 12.15 per cent in 2010-11. In actual terms the corporate profits rose from Rs 6.68 lakh crore in 2008-09 to Rs 8.24 lakh crore (2009-10), to Rs 9.47 lakh crore (2010-11) and to Rs 9.89 lakh crore (2011-12).

Clearly the corporates fattened on the giveaways, do not pass them on to the market. The giveaways have risen from Rs 2.85 lakh crore in 2007-08 to average Rs 5 lakh crore every year, totalling – believe it or not! – Rs 25 lakh crore for the last five years.

The argument to justify the criminal giveaways now is that it could not be cut when the growth is low and inflation is high.

But when it was the other way round – namely when the economy was booming, corporates in huge profits and inflation low – the giveaways were not cut, but they actually grew by almost 80 per cent between 2004-05 to 2007-08. Thanks to the giveaways, the tax-to-GDP ratio of 11.9 per cent in 2007-08 was actually far less than the full potential of the economy.

PIOUS RHETORIC

Surprisingly, Chidambaram himself had faulted the giveaways and had vowed to scrap them in the run-up to the Budget 2007-08. And the Prime Minister backed him.

In a news report titled “Bye Bye Exemption: Tax Exemptions hit Govt's revenue collection, PM promises action”, the India Today Online (February 12, 2007) said: “Buried in the voluminous budget documents is a startling disclosure: for every two rupees the Government collects in taxes, it forgoes one” by way of tax giveaways.

The report said that under the influence of lobbies successive governments had doled out tax cuts with growth as the alibi and companies with income of more than Rs.500 crore milked the cuts to pay tax at half the normal 33 per cent.

The magazine had quoted Chidambaram as saying “subsidies for poor should continue, exemptions for rich scrapped”; as Manmohan Singh saying, ““our tax regime should not have too many exemptions.” But, in the Budget for 2007-08, issued two weeks after their public vow to scrap them, far from reducing, the giveaways rose from Rs 2.35 lakh crore in earlier year to Rs.2.85 lakh crore; and finally to Rs 5.74 lakh crore now!

Now. Interestingly the Economic Survey 2012-13 presented 24 hours before the current budget faults the high tax giveaways.

Saying “the magnitude of revenue foregone is indeed high”(p66), the survey laments about corporate tax foregone (Rs 57,192 crore in 2010-11 and Rs 51,292 crore in 2011-12). It sheds tears over excise giveaways of Rs 212,167 crore (2011-12) and Rs 230,131crore (2010-11) and customs duty rebates of Rs 233,950 crore (2009-10), estimated to rise to Rs 276,093 crore (2011-12). The Survey concludes: “there is merit in limiting the exemptions or their grandfathering on a case-by-case basis so as to realise the fuller potential through wider tax base.” QED: the tax-to-GDP ratio did not fall fortuitously. It happened by design. Despite repeated warnings contained in the Budget documents themselves.

(The author is a corporate advisor)