Reading between Budget speech lines
Leave aside the sarkari lament. The fall in tax-to-GDP ratio over the
last five years is a result of deliberate concessions to corporates.
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)
(This article was published on March 7, 2013
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