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  • : Budget 2007: What the numbers say?

    Budget 2007: What the numbers say?

    Taking the route to meet basic needs and aspirations of the 'aam aadmi', the Finance Minister has once again outlined major outlays in his Budget for 2006-07. A large number of budget proposals are aimed towards the rural economy and high investment for long-term sustainable growth. Despite high allocations on these heads, the FM aims to maintain fiscal discipline. Simply put, he has projected revenue and fiscal deficit of 2.1% and 3.8% respectively for 2006-07, lower than the 2.6% and 4.1% levels likely to be achieved in 2005-06.

    In this article, we try and understand the financial statement of the Central government and gauge through the major heads of income and expenditure as planned for 2006-07.

    India: Financial snapshot
    2005-06 2006-07
    (Rs bn) Budget Revised Budget Change
    Revenue statement
    Tax revenue 3,700 3,701 4,422 19.5%
    Corporate Tax 1,106 1,036 1,330 28.4%
    Income Tax 662 662 774 16.9%
    Excise 1,215 1,120 1,190 6.3%
    Service Tax 175 230 345 50.0%
    Customs 532 642 771 20.0%
    Others 10 11 12 4.8%
    Less: Adjustments* 966 960 1,149 19.7%
    Net tax revenue 2,735 2,741 3,272 19.4%
    Non-tax revenue 777 743 763 2.6%
    Centre's revenue 3,512 3,485 4,035 15.8%
    Expenditure statement
    Non-plan expenditure 3,708 3,649 3,913 7.2%
    Interest payments 1,339 1,300 1,398 7.5%
    Defence 830 817 890 8.9%
    Subsidies 474 469 462 -1.4%
    General services 408 423 453 6.9%
    Social services 75 93 85 -7.9%
    Economic services 119 127 118 -7.0%
    Other 462 420 506 20.5%
    Plan outlay 2,113 2,053 2,540 23.7%
    Centre's expenditure 5,821 5,703 6,453 13.2%
    Deficit (2,309) (2,218) (2,418) 9.0%

    The main reason for the FM's lower revenue deficit estimate is his expectations of higher tax and non-tax revenues this year than was estimated in the earlier budget (see table above). However, these expectations carry a big caveat. When we break up the tax revenue as estimated in this year's budget, the top contributor i.e. corporation tax (around 30% of tax revenues), is likely to rake in growth of 28% over the revised estimate of 2005-06. This, the government has assumed on account of high growth of the Indian economy and rising profitability of Indian corporations. Overall, tax revenues are expected to grow by nearly 20%.

    Now, even when we consider any marginal slowdown in the Indian economy, a less than 20% YoY growth in tax revenues does not seem lofty. This is considering the fact that in the last decade, the highest growth in tax revenues stands at 23% (achieved in 1999-00) and the average growth has been around 15%.

    On the expenditure side, interest payments and debt servicing (36% of non-plan expenditure) continues to rule the roost, with the same expected to grow by 7.5% in 2006-07. This has cast huge pressure on the finances of the earlier governments, and with interest rates on the rise combined with large-scale investment plans, it might have a negative affect on the future numbers as well.

    What is noteworthy of this year's budget proposals is a huge increase in plan outlays (24% YoY growth estimated). Major investment is proposed in agriculture, energy, transportation, communication and social services segments. However, while the absolute numbers might look humongous, one should note that the government spends just around 10% of its total expenditure towards real human development, which includes education, employment, social services, health, income and social security. While factors like acquaintance with the English language and high levels of technology skills will play a very vital role in the growth of the Indian economy, sustenance in this growth can only be brought about by addressing basic needs of the populace. India has been a laggard on some of these human development factors. Also, due to a huge workforce and inability in proper distribution of wealth, a large proportion (around 35%) of India's population is poor. These factors, if not taken proper care of, are likely to ruin India's chances of building up a solid and sustainable growth model for the future.

    On an overall basis, the Union Budget for 2007 has aimed at playing a balancing game. In terms of managing finances better, the budget has laid emphasis on focusing expenditure on select (human development) priorities while expecting to grow its revenues at a decent rate. The budget has also seemingly laid out a long-term plan for the Indian economy. Importantly, as a strong measure of disclosure, the budget has identified a roadmap for managing results and achieving them. These things spell positive vibes for the Indian economy. However, as always, implementation will be the key.

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