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Pretty Woman or Ugly Facts... - Views on News from Equitymaster
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  • Feb 29, 2000

    Pretty Woman or Ugly Facts...

    There were a couple of choices on what we could have watched on television on the afternoon of February 29th:

    1. the Finance Minister on DD giving his live budget speech,
    2. the Finance Minister on Star TV giving his live budget speech, or
    3. Julia Roberts as the "Pretty Woman" on Star Movies.

    And we chose to watch the Finance Minister. In hindsight, Julia Roberts would have been a prettier sight. Raising taxes was not what made the Finance Minister's speech ugly. It was his inability to address the expenditure side of the equation was what killed the chances of a pretty painting for the country.

    Despite the relatively low rates of tax in India, avoiding taxes is still the favourite national game. Well, now we have to face the stick. Yes, punishing 1.5 million people for the lack of compliance by maybe 1.2 million people is not really fair to the 300,000 people who may be paying taxes fully. In any case, numbers is not the issue: the concept is. Basically, over the past 16 budgets spread over the past 16 years tax rates have been decreased dramatically. Our economy has trebled in size and, yet, the tax collections as a percentage of GDP have been stuck below 10%. When someone is nice to you and makes you prosperous, it would be nice if we reward them and share the benefits we get. However, we as a collective body of payers of tax and non-payers of tax, have been stingy and have not shared our increased wealth with the government. If we had shared our increased wealth, the government would have seen the tax/GDP percentage increase and would not have any reason to increase taxes.

    Although the raising of taxes is, in my view, justified the disappointment and ugliness comes from the relative silence on the expenditure side. The budget deficit for the year ending March 31, 2000 is 5.6% of GDP which is up from the 4% number predicted 12 months ago. That is equivalent to a company missing its forecasted net profits (losses in this case) by 40%. Guess what happens to the stock prices of listed companies when they miss estimates by 40%? Their stock prices collapse. And India, Inc is on its way down. The fact that India's debt position is heading south is not a new story and, now, unfortunately, nor is our ability to stem the rot.

    For next year, the estimated budget deficit is 5.1%: this means that the government is expecting this year to be bad again. And if estimates slip once again, as they do year after year, we will end up with a deficit of close to 6% again in 12 months time. No household, no business, no company, and no government can keep on spending more than they earn: that is a recipe for disaster. And that is what makes this budget ugly: high expenditures have been recognised, but nothing is being done to actually curtail it.

    So another budget day has come and gone but it is a step backward to the pre-1985 era of budgets. Prior to 1985, the government used to raise taxes year after year and not try to stop its expenditures. That is what makes it ugly. And that is why watching Julia Roberts would have been more fun. Maybe I'll request Star Movies to broadcast a replay.

    Ajit Dayal, 29th February, 2000



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