No gimmicks, please

Damned if you do, damned if you donít. When the FM rises to present Budget 2005, gimmicks will get him low marks. Ila Patnaik lists them out.


Cesses of any sort

Cesses are bad public finance. After all, income tax and VAT pay for public expenditures. If a budget is made up of a series of cesses, each of which is earmarked for specific expenditures, then we suffer from two problems. First, cesses are an inefficient way to obtain tax revenues: income tax and VAT are the only two good taxes. Second, the government suffers from severe budgetary rigidity in an environment with earmarked cesses.

Securities transaction tax

Transaction taxes are bad public finance. The only correct revenue bases are income (for income tax) and value-added (for VAT). A tax that penalises turnover generates peculiar distortions between certain kinds of businesses as opposed to others. For example, intra-week speculators suffer from more STT than intra-year speculators. It is not the job of the government to try to encourage or discourage any kind of business. The job of taxation is to take taxes from the country without disturbing the economyís functioning. And itís the exact opposite of making finance frictionless.

Forex for infrastructure

If our purpose is to have smaller foreign exchange reserves, then RBI should be instructed to sell dollars back on the market from which it bought them. If our purpose is to make progress on infrastructure, we need to resolve regulatory bottlenecks that are holding back the private sector. If our purpose is to run up bigger deficits, then there are more transparent ways to do it. Forex reserves for infrastructure is a gimmick if there ever was one.

Cascading subsidies

If a food subsidy generates a distortion in favour of wheat and rice, and hurts the growth of floriculture, the right thing to do is to scale down the food subsidy. Too often, the mistake that is made in budgeting is to introduce a new subsidy for floriculture. In this fashion, we now have procurement efforts by the government in numerous crops. Two wrongs donít make a right, it just makes a gimmick.

Small-ticket expenditure programmes

On a total expenditure (excluding interest payments) of Rs 348,329 crore in 2004-05, any single programme below Rs 1,000 crore makes no sense. The Centre is seriously strapped for staff of adequate quality at the senior levels. Small programmes simply do not command attention and are not run properly. The budget speech should not waste a paragraph talking about Rs 100 crore to be spent on a research programme on Ayurvedic medicines. Itís just a gimmick.

In conclusion, public finance is a conservative branch of economics, with a few key shining principles. The only two good taxes are income tax and VAT. Countries should run revenue surpluses in normal years, and incur deficits once in a few decades ó for example, in case of a war. Expenditure should be used to produce public goods. There should be budgetary flexibility to alter the mix of public goods that are produced.

The budgetís job is to keep India on course of good, sensible economic policy. It may look humdrum, but the core principles of public finance are just that.

Say no to gimmicks.


Ila Patnaik

Ila Patnaik