Do not be generous, Mr Mukherjee

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From news reports about tax changes that are likely in the Budget, one would get the impression that there is no sanctity to the Budget-making process, and that the Finance Ministry is not just a sieve, it is a colander. I doubt if this is the case, because Fin Min officials are not liberal with information even when not under surveillance.

The reports, in any case, are like the stuff supplied by our snooping agencies about impending terrorist attacks: non-actionable. The veracity of the reports will be attested only after the Budget, by when it will be too late to profit from them.

Interest in the Budget was on the wane in the past few years. The Budget presentation in February last year would have been a bland event, but for the loan waiver. The global financial crisis and the Congress Party's strong showing in the elections have re-kindled interest. There is hope that a fourth stimulus would be in the form of tax concessions.

Finance Minister Pranab Mukherjee himself has allowed play for speculation. In his first press conference after assuming office, he said fiscal consolidation would be achieved "over the next 2-3 years," indicating that it was not an immediate priority. He called those fixated on the fiscal deficit and increased public expenditure as "prophets of doom." But Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, has said that a decision to spend more will have to be tempered with negative perceptions it might create. Mukherjee has also suggested that the government may not be free with money. A "sustained stimulus would come from the next round of reforms," he said upon taking over.

If the Finance Minister wants to spread cheer and improve consumer confidence, he could do away with the vexatious Fringe Benefit Tax, which at round Rs 8,000 cr yields two per cent of tax revenue. But a reversal of indirect tax concessions would mesh with the five-year reform agenda that he has promised to present, and the move towards a goods and services tax. Even though the Securities Transaction Tax yields lesser (Rs 5,500 cr last year) than FBT, one does not expect it to be replaced, because it was introduced in 2004, to check evasion of capital gains tax.

The Finance Minister will be hemmed in by the large social sector spending bill. The tax for the National Rural Employment Guarantee Scheme will rise by a third to Rs 40,000 cr. The yet-to-be launched National Livelihood Mission will cost around Rs 2,300 cr. And the Right to Food that the government is keen to enact would blow big hole, if not targeted at the needy.

An exercise is currently on to do just this. According to the Planning Commission's criteria there should be 59 million below poverty line (BPL) families. If rice or wheat is provided only to them at the discounted Rs 3/kg, the tab would be Rs 21,000 cr, about half the amount provided in the Interim Budget. But the Centre supplies rations to those considered very poor five years ago, and there are 65 million such families. States, however, have used BPL cards to buy votes and have in all issued 107 million cards, most of them to the non-poor.

Weeding out these cards, and denying rations to those above the poverty line (158 million cards), would present a huge political challenge.

Interest payments are already a quarter of the gross tax revenues. According to the IMF, India's public debt will touch 87 percent of GDP by end of this year. The silver lining is that most of this is in rupees. But it is much higher than the proportion of Emerging Market (G-20) debt , which will be 38 per cent.

The government spent big time in previous years because tax revenues were strong. It has reason to spend now because the economy is weak.

Our government does not need to be persuaded to spend. A good Budget for me would be one where it resists the temptation to be generous.