National Budgets: The US and India

 In the US, domestic political compulsions prevent hiking taxes on their super rich, despite people like Warren Buffet offering to pay higher taxes. On the other hand, our poverty-stricken rural poor, designated Below Poverty Liners, are driven to suicides

We, in India, are not the only nation to suffer the likes of finance minister Pranab Mukherjee’s seventh disappointing Union Budget. There is stringent criticism of the US Budget, too.

Today, both India and the USA stand at the cusp of economic downturn, but for varied reasons. The US, like all the major western economies, is trying to steady itself. But domestic political compulsions prevent hiking taxes on their super rich, despite people like Warren Buffet offering to pay higher taxes.  President Obama is digging his heels on health insurance reforms and stepping up on local job creation. 

Here, in India, we have a very wide income disparity—with the numbers of the super-rich also termed ultra-high networth individuals going up many times and also appearing in the international top rich listing, and on the other hand, our poverty-stricken essentially rural poor, designated  BPL (Below Poverty Liners) are driven to suicides. The Planning Commission estimates the poverty ratio at 29.8% in 2009-10 based on calorific consumption patterns linked to the Consumer Price Index. 

Taking the American budget first. Paul Krugman, writing for the New York Times News Service headline—Pink slime economics on the US Budget, levels a serious charges—“Republicans in the House of Representatives passed what was surely the most fraudulent budget in US history... isn’t just its cruel priorities, the way it slashes taxes for corporations and the rich while drastically cutting food and medical aid to the needy... (It) purports to reduce the deficit—but the alleged deficit reduction depends on completely unsupported assertion that trillions of dollars in revenue can be found in closing tax loopholes... Representative Paul Ryan the chairman of the House Budget Committee, however, has categorically ruled out any move to close the major loophole that benefit the rich, namely the ultra-low tax rates on income from capital, pay lower tax rate than that faced by many middle-class families... a kind of throwback to the 19th century, where unregulated corporations bulked out their bread with plaster of Paris and flavoured their beer with sulphuric acid... would actually make the deficit bigger even as it inflicted huge pain.

“We’ve had irresponsible and/or deceptive budgets in the past. Ronald Reagan’s budgets relied on voodoo, on the claim that cutting taxes on the rich would somehow lead to an explosion of economic growth. George W Bush’s budget officials liked to play bait-and-switch, low-balling the cost of tax cuts by pretending that they are temporary, then demanding that they be made permanent... The House Republican budget isn’t about to become a law as long as president Barack Obama is sitting in the White House.”  Krugman ends with a scatting indictment—“For a lasting budget deal can only work if both the parties can be counted on to be responsible and honest—and the House Republicans have just demonstrated, as clearly as anyone could wish, that they are neither.”  

Our Budget for 2012-13, too, has been an uninspiring exercise, inasmuch as it seeks to bring about meaningless cosmetic changes—the basic threshold hiked by just a trifling Rs20,000 to Rs2,00,000 when the Parliamentary Committee had suggested Rs3,00,000.  The proposed new deduction of Rs5,000 for preventive health check  is begging a lot of questions. The Rajiv Gandhi Equity Scheme has many conditionalities like restricting its availability only to first-time investors, maximum of Rs50,000, three-year lock-in. Restricting the non deduction of taxes at source only on savings bank accounts where the balances maintained by an average Indian are so very low; instead it should have been applicable to all bank deposits (the old Section 80L permitted this)—savings, term and recurring—to be really meaningful.

Adding to the miseries of the aam admi this budget further proposes a major shift in taxing services consequently affecting the poor more than the rich. It has pushed up prices of necessities across the board. Sushil Kumar Modi, the deputy chief minister of Bihar and chairman of the Empowered Committee of State Finance Ministers on GST (Goods and Services Tax) rightly points out that the Centre, by taxing activities listed in the State List, has kicked in constitutional impropriety that lies in the heart of Centre-state jurisdiction as it tantamounts to encroachment on the territory reserved for the states.  It transgresses the Lakshman Rekha laid out by the Constitution and also runs the risk of failing to meet judicial scrutiny. 

The concept of service taxation initially brought in by the Finance Act of 1994 began with taxing just three services, has today swelled to tax 119 under Entry 97 of List 1 to the Seventh Schedule of the Constitution. It was expected to yield Rs95,000 crore revenue during 2011-12. With the introduction of the Negative List approach, the expanded tax base is expected to bring in increased revenues of Rs1,24,000 crore in the current fiscal. 

Perhaps, it is for the first time this budget contains measures to tackle the menace of black money, anti-cross border tax avoidance, benami transactions, inclusion of more tax payers and a more transparent tax network between states, PAN-based GST-N network for facilitating subsidy deliveries, taxing gold purchases and sale of agricultural land, widening corporate taxation, re-opening I-T assessments, flat taxation for incomes generated out of deemed credit, investments and expenditure, tracing and taxing the flow of hot money, bringing transparency in market transactions.

While the direct taxes are reduced by Rs4,500 crore, the indirect taxes increased by Rs40,000 crore. The budgetary allocation for education is a measly 0.73% of the GDP (gross domestic product), an increase from 0.69% earlier, when the international norms for spend on education is 6% of the GDP. Allocation for rural development declined from Rs74,100 crore to Rs73,175 crore, with the actual expenditure last year only Rs 67,138 crore. The allocation for defence is 2% of national income. Both education and defence do not seem to be on the government’s high priority list.           

The Indian Union Budget has not brought about any substantive measures to reignite the slowing down Indian economy that is primarily a result policy paralysis arising of the government’s inability to address concerns on vital issues, bringing down GDP growth of 9% in the past two-and-half years to 6.1% in the quarter ending December 2012. Even a fall of 1% brings about almost 15 lakh jobs and a lot of pain.

Economist SS Tarapore, a former deputy governor of the RBI, writing on Inflation will hurt the common person presents a grim warning—macro-economic scenario is fraught with dangers. After two years of close to double digit inflation, it has come down to 7%...  created money will provide for growth and common person will suffer inconvenience of a little more inflation... This implies providing incentives to the upper income groups while inflation is to be borne by the lower income groups. The balance of payments Current Account Deficit (CAD) in 2011-12 is expected to be close to 4% of GDP which is even higher than that in 1990-91. The present levels of reserves of $294 billion now cover only five months of imports and one year debt repayment have been stagnant and are now declining. Earlier the reserve cover was as high as 12 months. An unsustainable exchange rate invites external shocks, which could degenerate into a crisis like 1990-91 with an inevitable upsurge in inflation. 

There is a crumbling of the rule of law with the neta-babus violating laws with impunity. They have given Raj Dharma, higher than the king, a go-bye.  We Indians always held a rule of law expressed as dharma that provided coherence to our lives, reduced uncertainty and assured self-restraint. Bharat Ratna PV Kane rightly called our Constitution a Dharma text. The amendment, in the Budget, going back 50 years to counteract the Supreme Court ruling in the Vodafone tax case is bad enough, though all right thinking people don’t necessarily condone the tax avoidance strategy resorted to by them. The predatory taxation of Cairn to pay $90 a tonne, as against $18 to others. The reopening of environmental clearance to Maharashtra Hybrid Seeds Company, which had carried out 25 environmental bio-safety studies by independent agencies, rigorous field trials by two agricultural universities and complied with all protocols to the government’s satisfaction for the Bt Brinjal. The cancellation of Norway’s Telenor licence initially given out corruptly. These are many of the UPA-2 government’s flip-flops of policy paralysis when it seems to be tying itself in knots because of Coalition Dharma compulsions and not the traditional Raj Dharma that has stood the test of time over the millennia. 

(Nagesh Kini is a Mumbai based chartered accountant turned activist).

 Credits for inputs

  1. Free Press Journal - Inflation will hurt common person and Service Tax: A commendable change but issues remain.
  2. Sunday Times of India – The Government is not above the rule of law. 
  3. Hindu Business Line – A relook at negative services list and Pink slimeeconomics.
  4. The Week – The Budget ushers in host of anti-graft policies and Pranab Mukherjee cheated us, says economist Vinod Vyasulu.
R Nandy
1 decade ago
In India education is primarily a state subject and most states allocate between 15-20% of their budget
for education.The Centres grants to the states including directly sponsored expenses comprise its budgetary
allocation for education.So,the overall Gov(Central + State) budgetary allocation for education will probably
be more than 0.73% of GDP.(?)
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