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An anti-investment anti-people budget.

An Anti-Investment Anti-People Budget

Presumably, it is because of the economic predicament the PPP Government is in due to the compulsion of meeting enhanced demands of national defence in view of the tension on the borders and threat to national security, mounting liability of debt servicing, strong resistance of farming lobby to imposition of tax on agricultural income and finally the IMF pressure for greater financial discipline using its own yardsticks and parameters for assessing good financial management that a policy agenda seems to be missing. It has chosen the beaten track because of the limited room for manoeuvrability. Thus the budget grievously lacks any sense of direction and one fails to discern the Government's long-term strategy for the rebuilding of the economy.

The Federal Budget for 1990-91 has been passed with a few adjustments. Taxes on 22 items have been withdrawn or reduced taking into account the suggestions of the MNAs and businessmen. It would lower the Government revenue by Rs. 522 million but the loss will not be made up through additional taxation. The gap will be filed through better tax collection. Thus the total tax package has been reduced to Rs. 12.5 billion and the budgetary gap has increased to Rs. 20.5 billion. Keeping in view, the past performance of the tax department, it is highly doubtful that a gap of Rs. 3.5 billion can be bridged through better tax collection. (The remaining gap of Rs. 4 billion is to be filled through deficit financing). In the situation, additional taxation or more deficit financing are the only alternatives.

What parliamentarians could not achieve, the businessmen have achieved. Despite their threat to block the passage of the budget from the very beginning of the budget session, the Opposition miserably failed in its mission. Perhaps, the treasury benches were in a far more formidable position to outmanoeuvre the Opposition and realising this the latter withdrew in its shell. However, angry businessmen managed to force the Government to concede at least some of their demands even though their strike remained almost a non-starter because of sharp division in its own ranks.

The business-government impasse happily ended when the FPCCI called off the `partial' strike in response to the Prime Minister's call for a dialogue with the relevant ministers (finance, water and power, commerce) and her adviser to sort out the current impasse between two sides. The businessmen wanted withdrawal of all policy decisions which were likely to increase the cost of production. This included increase in user charges of all utilities, specifically power, increase in the minimum wages of the workers without linking it to productivity, increase in the import surcharge and levy of GST by broadbasing the sales tax in the country.

As a result of the dialogue, the crisis has been seemingly resolved. While withdrawal of some taxes and reduction of some was thought expedient to appease the disgruntled business community, these measures have not come even close to the latter's demand. The relief has obviously been afforded to the power structure in the industrial community like textile, automobile and computer industry. The broad section of the private sector has genuine cause to grumble against the harsh nature of the budget. There is consensus among industrialists, economists, politicians and consumers that it is an ill-conceived budget which will hit every section of the population very badly.

The crux of the matter is that during the brief period of 18 months of its rule, the PPP Government has imposed taxes of more than Rs. 40 billion (including deficit financing and non-tax measures) which is a crippling burden indeed. During 1990-91 alone, an unprecedented resource mobilisation effort of Rs. 12.5 billion through tax and non-tax measures has been made. The only exception is the aborted budget of Mr. Yasin Wattoo during Junejo Government. Although the Government sources maintain that by and large the people have accepted the budget, the fact of the matter is that it has exasperated all sections of the population. It is apprehended that a budgetary gap of Rs. 20.5 billion as against a GDP of 800 billion rupees would lead to at least 3 per cent increase in inflation rate. A two-digit inflation is already gripping the economy. Independent economists place it at 17 per cent against the official figure of 5.7 per cent which no sane person would accept.

Admittedly, the Government was under pressure from the IMF to reduce reliance on borrowings, curtail deficit financing and current expenditure, avoid ambitious development planning, reduce subsidies and step up resource mobilisation effort to meet the budgetary gap. There cannot be two opinions about the advisability of these measures to put the economic house in order. The Government is committed to reduce deficit financing to 4.9 per cent by 1991-92. This year it has been reduced to 5.5 per cent of GDP.

Apparently, these seem to be laudable objectives. But the question is whether the economy can bear the burden of Rs. 12.5 billion worth of taxes, will it not stunt the growth impulse inducing cost-push inflation and bringing all investment activity to a grindling halt and will it not add to the hardship of the common man who is already labouring under soaring cost of living? There is a consensus among independent economists that the need for additional taxation can be largely obviated if tax evasion and corruption are effectively checked. Every year Rs. 40 billion are siphoned off the Government resources due to corruption, according to the former Finance Minister, Dr. Mahbub-ul-Haq.

Another aspect of the budget that has come under sharp criticism is the grievous lack of policy initiative and innovation. It is a purely bureaucratic budget designed to fill the budgetary gap some way or the other. The people's representatives, businessmen and economists have not been involved in its making. Hence the lack of any sense of direction in the budget would surprise none. It is not a budget at all. For, a budget reflects the hopes and aspirations of the people and provides answer to their economic problems. It is even poorer than previous budgets which had some developmental bias. No doubt, an Annual Development Programme of Rs. 63 billion has been approved out of which 14.7 per cent has been earmarked for the provinces. But the most tragic part of this programme is that 65.22 per cent of it is going to be funded through foreign loans. The rest will be financed through saving schemes. But the big question is how much will be the return on these investments? So far the public sector has made an investment of Rs. 400 billion. How much has it earned out of it? The basic investment of the Ministry of Production itself stands at Rs. 40 billion. Little or no profit has accrued from it so far. Whatever little profit, the state-owned projects show is not due to their better performance but because they have been given protection through higher customs duty on imports. More often than not, they also resort to monopoly pricing and enjoy many other preferences.

Evidently, the IMF pressure is so strong that the Government could allocate for the development programme less than both defence and debt servicing. Even after a hefty taxation and non-taxation measure of Rs. 12.5 billion, there is a gap of Rs. 8 billion, designed to be filled through deficit financing and better tax collection. However, improvement in tax collection has so far been a wishful thinking and hence in view of the bitter experience of the past, it is a foregone conclusion that the gap will be bridged by additional taxation measures. So let all of us wait for the mini-budget soon. The other alternative is more deficit financing which the Government can't dare because of IMF's conditionality. After an enhancement of 8.33 per cent in electricity rates and earlier 15.8 per cent rise in POL prices (fetching the Government Rs.8 billion), a hike in gas prices in the mid-term cannot be ruled out.

The Government has justified these taxes on the plea that the geo-political situation underscored the need for beefing up our defence and thus the allocation under this head has been increased by Rs. 10 billion in 1989-90 and by 2.2 per cent in 1990-91. The development outlay has increased by 12.5 per cent. Indirect taxes represent about 86 per cent of total taxes and mainly comprise customs and central excise duties and sales tax, increase in import licence fee from five to six per cent along with a three per cent hike in import surcharge. This will prove highly inflationary. Add to this, the 8.33 per cent increase in electricity charges to raise Rs. 2.72 billion and withdrawal of sales tax exemption from 31 items which will only exacerbate inflationary pressure. The businessman and industrialist will pass on the burden to the consumer: in fact the price hike will far exceed the actual tax burden which would unleash a virulent wave of inflation. The budget subsidy on atta has been reduced by 23 per cent compared to rise of 12.8 per cent in 1989-90 which would only add to the hardship of the consumer. Obviously the Government has succumbed to the IMF pressure to raise food prices without realising its socio-political ramifications.

While additional taxation has been resorted to in the name of development over the decades, only one-third of the additional revenue has been allocated to development. Understandably, therefore, development outlay has dropped to about 25 per cent of the overall budget which is highly disappointing. With a population growth rate of 3.2 per cent per annum in Pakistan, the gross inadequacy of the development outlay is all too obvious. The Government could not provide more for the ADP because of 13.4 per cent increase in the cost of debt servicing raising the liability to a crushing Rs. 68.4 billion, more than the outlay for defence. While, the country has been sinking deeper and deeper into the marsh of foreign indebtedness, such heavy borrowings have brought little return in terms of economic benefits. Large investments in the public sector have made little contribution to the betterment of the economy or to the public good. Hence in 1990-91 also, the Government had to rely on borrowings worth 1.9 billion dollars from the IMF and others. This dependence has seriously disrupted sound financial planning and has perpetuated survival economy.

The taxation continues to be regressive which hits the low and middle income groups hard. As usual, indirect tax constitute 86 per cent of total taxes. While income tax revenue will increase by a meagre sum of Rs. 963 million, the income from indirect taxes will be Rs. 6.912 billion.

The import cost will obviously go up because of enhancement of the import surcharge and import licence fee and overall rise of the import duty by Rs. 4.2 billion along with the General Sales Tax. Since our industry is mostly based on imported raw materials and machinery, this would substantially enhance the production cost of manufactures, while additional excise duty of Rs. 2.12 billion and the GST would further increase the prices of the products. Thus the competitive edge of Pakistani goods in the foreign markets will be sharply eroded. The domestic consumer, on the other hand, will have to pay through his nose for the basic necessities of life. One has to take into account the increase in electricity charges and labour cost as well. Thus the total effect of the budget on national industry will be negative and the cost of both production and exports will rise sky high. This may also load to further devaluation of the rupee resulting in corresponding rise in import prices in rupee terms. The situation, therefore, gives rise to grave concern.

The independent economic observers ask that will the Government be able to mobilise all the resources projected in the budget through additional tax and non-tax measures? Taking the poor performance of the tax collection machinery in the past years and high incidence of corruption, the answer is an emphatic NO. In the event of the failure to mop up the desired resources through sweeping measures, the Government will have to take recourse to currency printing as it did this year. This will only add fuel to the inflationary fire.

Among the positive features of the budget are restoration of 15 per cent tax credit for BMR and 50 per cent rebate on sugar produced in excess of 1989-90 production. There can be no denying that the Government is faced with serious resource constraint and is in dire need for mobilising more resources to meet its internal and external commitments but it would have done well to lay greater emphasis on better tax collection nabbing the evaders with a will. Tapping of untapped sources like feudal lords could also go a long way in bridging the resource gap. In a rapidly growing economy, the revenue through income tax, sales tax, excise duty and customs duty is not increasing in the corresponding proportion which only underlines the need for plugging the gaping holes. The need for taxing modest growth excessively would not arise if tax evasion and corruption are checked. It is a tough job but given the will and sincerity of purpose, a political Government should be able to achieve the seemingly impossible. So long as this is not done and the Government continues to choose the conventional path of imposing additional taxes on the hard pressed people every year, it will only contribute to the agony and hardship of the masses.

According to budget documents, collection from sales tax up to April, 1990, stood at Rs. 14.56 billion against an estimate of Rs. 26.15 billion indicating a gap of 9.8 per cent. While collection of sales tax from imports fell by 7.2 per cent upto April, 1990, it dropped by 12 per cent in the case of domestic manufactures. The documents reveal that while 77.1 per cent of the sales tax dues were collected by April last year (1989), only 75.15 per cent could be collected up to April this year. It is officially acknowledged that the `realisation is not very satisfactory'. It throws into bold relief the inefficiency of the relevant machinery. The economists attribute limited capacity of the taxation officers to collect more on the basis of existing rates to rampant corruption in their ranks. They urge for radical restructuring of the economy and revamping of the archaic and overloaded fiscal system.

Presumably, it is because of the economic predicament the PPP Government is in due to the compulsion of meeting enhanced demands of national defence in view of the tension on the borders and threat to national security, mounting liability of debt servicing, strong resistance of farming lobby to imposition of tax on agricultural income and finally the IMF pressure for greater financial discipline using its own yardsticks and parameters for assessing good financial management that a policy agenda seems to be missing. It has chosen the beaten track because of the limited room for manoeuvrability. Thus the budget grievously lacks any sense of direction and one fails to discern the Government's long-term strategy for the rebuilding of the economy.
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Title Annotation:Pakistan
Author:Jabir, Rafique
Publication:Economic Review
Date:Jul 1, 1990
Previous Article:Shariat bill.
Next Article:A revolutionary trade policy.

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