FM under pressure to give more to 'aam aadmi'

New Delhi, Feb 27: Fourth Budget of the UPA government appears to be a razor's edge walk for Finance Minister P Chidambaram as he needs to delicately balance several parameters with some perhaps conflicting, high inflation, signs of overheating of the economy and maintaining confidence of the investors.

Mr Chidambaram's dilemma is compounded by the reverses in the assembly elections with his critics charging that high inflation was the root cause of the debacle.

Speculations are rife that Mr. Chidambaram while presenting the Budget on Feb 28, 2007 to Parliament may give more money to the common man than what had already been agreed in allocations to the social sectors.

The Congress has been jolted by the election results in Punjab and Uttarakhand, where it had to swallow a humble pie.

Voices have already started emerging from political pundits in the Congress and allies of the UPA that inability of the governemnt to bring down the price rise led to the defeat at the hustings.

The developments clearly lead to the conclusion that Mr Chidambaram would have to shell out more on social sector programmes. The Budget cannot simply be built on an exercise of high growth rate of the economy and overflowing foreign exchange reserves.

Nor will the claim of economic think tanks of the government that the policy initiatives have created demand for investment in India pacify those not so soft on reforms.

Indications are that many Central Ministries are not satisfied with the Plan outlays as they have been arguing that more needs to be spent on social sector programmes, which are the umbilical cords of the National Common Minimum Programme. Many consider its implementation a key for winning the confidence of the voters.

The economic think tanks are arguing for giving a few thousand crores of rupees more to the already agreed Gross Budgetary Support to give a more pro-poor image to the budget, which has been drafted within the constraints of FRBM and on the assumption of an average growth rate of 9 per cent.

Just merely indicating future commitments of enhanced outlays on social sector could save Mr Chidambaram from accusations of vitiating fiscal prudence, which is considered to be the back bone of India's image of a country serious about sustaining growth.

According to Finance Ministry sources, interest payment on outstanding loans would take 3.37 per cent of GDP, while Defence allocation would come down to 2.2 per cent from 2.26 this year. Pay and allowances were likely to take 0.98 per cent of GDP against 1.01 per cent for the current year as a natural fall-out of the government's policy to avoid filling posts falling vacant on retirement.

A reduction in subsidies is also on the cards because of the government's decision not to add to inflation by way of subsidies.

As the tax buoyancy has been worked out at 1.25 per cent and marginal rate of interest at 7 per cent, the revenue receipts to Centre on net tax are likely to increase from 8.2 per cent of GDP to 8.38 per cent and annual growth in non-tax revenue is likely to grow at 12.5 per cent, which in GDP terms will fall from 1.93 per cent to 1.88 per cent.

The gross tax revenue thus will grow from 11.2 per cent to 11.51 per cent, making additional borrowings for expenditure as usual unnecessary.

With commitments to maintain gross fiscal deficit at 3.40 per cent and revenue deficit at 1 per cent of GDP, Gross Budgetary Support was unlikely to be more than Rs 2,00,000 crore.

This clearly indicates that for maintaining an investor-friendly environment, the Budget will announce a special window to fund infrastructure development projects, for which the probability of evolving a mechanism aimed at using a part of foreign exchange reserves will be high.

The government's resolve is to revisit exemptions and some corrections of distortions in trade and commerce should be in the offing. In his last budget, Finance Minister had indicated that the cost of exemptions was around Rs 1,40,000 crore.

Mr Chidambaram would preferably tinker with only those exemptions which were unlikely to have a major dampening effect on the stock market.

To neutralise adverse impact of this move, he may please the corporate sector by slightly bringing down corporate tax. He may undo the revenue loss through stricter collection of taxes.

UNI