Look at what146;s not there

This is not really a politician8217;s budget. Because the reformist line has been held, despite politics

P Chidambaram could have listened to many of his political colleagues and 8216;taxed the rich8217; and discovered new avatars of populism. Many UPA politicians were saying what good 9 per cent growth does to us, and that was before the Congress lost Punjab and Uttarakhand. The sensible way to look at this budget is therefore not in terms of all the reforms the FM didn8217;t announce but how much real damage politics has extracted. On that the verdict must be: not much. Chidambaram has kept the growth story going. He hasn8217;t let fiscal correction slip. That task was perhaps made easier by the fact that the budget was tabled in an environment of unprecedented GDP growth, export growth at rates double the GDP growth rate, and double-digit growth in manufacturing.

With high revenue growth and deficit targets on track, no new taxes were imposed, bar another education cess and the extension of the fringe benefit tax. An increase in expenditure expenditure of Rs 1 lakh crore is budgeted for 2007-08 without upsetting FRBM targets 8212; that8217;s possible because of high revenue growth. While a number of small changes were made, as expected, neither the expenditure side nor the tax side introduced significant unanticipated changes. Look at, in this context, what could have been there had the budget really reflected aggressive politicking: there is no long-term capital gains tax or an inheritance tax or a raising of the corporate tax rate.

For the macroeconomy, the budget brought good news, too. Deficit targets are on track despite demands for innumerable schemes from every department and from social activists. The revenue deficit in 2007-08 is budgeted to come down from the 2006-07 level of 2 per cent to 1.5 per cent of GDP. Similarly, the fiscal deficit is budgeted to come down from 3.7 per cent of GDP to 3.3 per cent. And the primary deficit 8212; a better measure of the present government8217;s deficit as it is measured by the fiscal deficit minus interest payments 8212; which is really a legacy of past governments, will show a surplus of 0.2 per cent of GDP. There were one major regression. The government is really back to 1970s style economics with a ban on futures trading on wheat and rice 8212; a real concession to political scare-mongering. But again, other than this concession to pressure from the anti-reform lobbies, there was no other major reversal of reforms.

On the expenditure side, the budget primarily increased spending on existing schemes. No major new initiatives except the merit-cum-means scholarship were taken up. The most significant medium term folly of the UPA lies on the expenditure side. Revenue plan expenditure, which is spent on the 8220;flagship schemes of the UPA8221; such as Sarva Shiksha Abhiyan, has been ratcheted up dramatically from Rs 111,858 crore in 2005-06 to Rs 144,584 crore in 2006-07 to Rs 174,354 crore in the coming year. This exuberance of expenditure is, alas, not matched by results. There is, as yet, little evidence that these expenditures are effective. The recent ASER report reminded us that the Sarva Shiksha Abhiyan approach of herding children into government schools achieves nothing in terms of their learning accomplishments.

There were no major changes in direct taxes, none were expected or really called for, especially since the tax code is being rewritten. Small changes are expected to yield an additional Rs 3,000 crore. Personal income tax threshold limits were raised by Rs 10,000, a very small tinkering providing a relief of Rs 1,000. If the policy behind this is to link the threshold limit to inflation every year then it would do away with the adjustments that need to be made after many years of making no adjustments, which is then good news for tax payers who can hope to see small changes in limits every year. Of course, raising the dividend distribution tax from 12.5 per cent to 15 per cent makes acute the double taxation problem. As for extending the FBT to employees8217; stock options, taxing ESOPs is not the issue, the question is whether FBT is the right tax for it. There are niggling questions like this in this budget. But there8217;s no huge question mark, after the budget, on the direction of the economy.