Pranab’s aces

True,the world has changed a lot in the last 28 years,besides being hit by one of the worst economic crises just ahead of Mukherjee’s return to North Block. But perceptions have not. Because Mukherjee,who admits to being conservative,does not shed tradition just to present a modern world-view. Ahead of the Budget,he called upon various stakeholders,including trade unions,corporate India and non-governmental organisations and heard them out.

So,even though Budgets elsewhere are a mere statement of the government’s estimated receipts and expenditure for the forthcoming fiscal,in India,Mukherjee will retain its old-world charm by doling out largesse to an assortment of industries and sectors. Part II of the Budget with all the tax proposals will continue to keep the industry glued to television.

Mukherjee’s Budget for 2009-10 last July was presented in the backdrop of a shaky global economic revival. He expanded the stimulus programme with further tax cuts,but also emphasised the need to bring sanity to fiscal management in the coming year(s). This was on expected lines. No surprises,no shocks.

This Budget,however,he may have the audience stand up and take notice of his speech. In the run-up to the Budget,he has put his foot down on two critical issues—spectrum for third-generation (3G) telecom services and fertiliser subsidy,driven solely by budgetary constraints.

He will have some aces up his sleeve on February 26. Brace yourself for surprises or shocks,again from Mukherjee after 28 years.

1). Surprise Stimulus

This is Mukherjee’s first full Budget after the global economic crisis. He presented the Interim Budget for 2009-10 as well as the regular Budget in July last year,and both focused on mitigating the indirect impact of the global meltdown. At the core of the debate today is what happens to the stimulus. There are two parts to the stimulus that India provided to its economy after September 2008—tax cuts and expenditure increases. The jury is still out on whether or not he should withdraw it.

Intuitively,Mukherjee will initiate the exit. But,contrary to expectations,he may not opt for a roll-back of the tax rate cuts. Excise duty was reduced from 14 per cent to 8 per cent and service tax rate trimmed from 12 to 10 per cent as part of the stimulus. The minister reckons that private investment needs to be encouraged and government spending curtailed. His dominant focus will be on expenditure compression. He knows little can be done on sticky expenditure items such as interest payments on government borrowings and salaries and wages,but allocations for ministries and some flagship programmes can be pruned. Come to think of it,even the Reserve Bank of India has not thought about cutting interest rates despite rising inflation,though that’s largely because of higher food prices.

The developed world,Europe in particular,is not out of the woods and there are nagging doubts that the situation may worsen. A premature exit will do more harm by killing the incipient recovery.

2). Surprise Fiscal consolidation

This is close to his heart. He desperately wants to rein in the fiscal deficit (the amount the government has to borrow to bridge the difference between its receipts and expenditure). The deficit is estimated at 6.8 per cent of the GDP or a whopping Rs 4,00,996 crore in 2009-10. Mukherjee’s insistence that auction of 3G spectrum be conducted this year is a desperate attempt to better his own estimate of deficit. A Rs 30,000-crore one-time collection from auction will help him cut this year’s deficit by 50 basis points to 6.3 per cent of the GDP. This will give him flexibility to project an ambitious estimate of less than 6 per cent for the next fiscal,2010-11. If he achieves this,he would have won his battle with economists and commentators.

Mukherjee is not taking any chances for next year,though. As a first step,he has pushed through a 10 per cent hike in urea prices in addition to a nutrient-based subsidy regime for fertilisers that will sharply reduce the subsidy bill by about Rs 44,000 crore. While he did have a tough time with Fertilisers Minister M.K. Alagiri,doing away with the subsidy on petrol and diesel may not be difficult with Congressman Murli Deora as Minister of Petroleum and Natural Gas. Some flagship programmes may see substantially lower allocation and state-owned companies may not get any money next year to accommodate a food-for-all programme. After all,the stimulus on account of expenditure increases added up to 2.2 per cent of the GDP.

3). shock Income Tax

Mukherjee will desist from tinkering with personal income tax rates and exemption limits. Companies will not get any tax breaks either. At best,there will be a one-liner on overhauling the tax structure: more discussions are required in the proposed direct tax code. Much of the work on the code was undertaken when P. Chidambaram was finance minister. The draft code is a bold agenda to increase tax payer compliance,plug loopholes and eliminate distortions. But there is stiff opposition from industry lobbies. After holding ‘intellectual debates’ for over six months,Mukherjee could not make up his mind on two crucial aspects: minimum alternate tax (MAT) and taxation of long-term savings instruments.

The draft direct tax code proposes to impose MAT on gross assets as against book profits now. This upsets India Inc and every industry body has openly criticised the proposal because it hurts. Taxing long-term instruments such as provident fund and savings certificates goes against the Congress’s aam aadmi plank. When any issue concerns a range of stakeholders,Mukherjee considers it wise to put it on the backburner. No hurry,because the gains from such reforms are in the realm of unknown. He will buy time from the industry. He realises everyone can live with one more year of a distorted tax regime—they have lived with it for so long. It will be a wasted opportunity because it’s only in the first and second year of a newly-elected government that big-ticket plans can be pursued.

4). Surprise GST

For all practical purposes,the biggest indirect tax reform that promises a single goods and services tax (GST) rate across the country looks buried. The final word will be out only on February 26. Mukherjee,who shares a rapport with West Bengal Finance Minister Asim Dasgupta,chairman of the empowered committee of state finance ministers on GST,may just go ahead and announce its date of introduction along with a single Central GST rate of 7 per cent. A consensus eludes the committee,with many of Dasgupta’s counterparts demanding a higher state rate,but Mukherjee may bite the bullet.

Behind the scenes,there is a lot of conviction among not just the top leadership,but also the industry,on this third-generation and difficult reform move. Difficult,because it involves states,and without all of them on board,the GST cannot be introduced in a federal structure like India’s.

The Vijay Kelkar-led Thirteenth Finance Commission is learnt to have recommended a 7 per cent rate for the Centre and a 5 per cent rate for states. As a first step,Mukherjee will converge the two tax rates of 8 per cent Cenvat on goods and 10 per cent tax on services to a single rate. This will set to rest doubts about his seriousness on GST. Deputy Chairman of Planning Commission Montek Singh Ahluwalia,too,has been pushing for a 7 per cent Central GST rate. The announcement will be a baby step,but a giant leap forward in simplifying the tax regime.

5). shock Prices

Unfortunately,there is little the finance minister can do to rein in prices,more specifically of food products. He can only make comforting noises. Against RBI’s forecast of 8 per cent by March end,inflation based on the wholesale price index is already past the 8.5-per cent mark. Food price inflation has been close to the 20 per cent mark for months now,and all that the Government has done is ask people to consume less sugar. Liberalising imports did little because it was unviable for companies to ship sugar into India.

Mukherjee’s Budget will talk a lot about the government’s intention to secure food (rice and wheat) for the poor by introducing the Food Security legislation and to control prices,in general. But,as far as action is concerned,he can only strategise for the long-term and keep liberalising imports in the short-term.

He can ill afford not to push for higher growth,and once demand picks up,it is only likely that commodity prices will rise. Inflation that is now restricted to food products will spill over to the manufacturing and services sector as industrial output accelerates. This will put pressure on the RBI to hike interest rates to suppress demand. The challenge of keeping inflation and interest rates low while maintaining a stable exchange rate will rekindle debates that were rife in India in 2007,when the economy was said to be overheating. While it is for the RBI to manage this,the aam aadmi doesn’t quite distinguish between the RBI and the government.