The reformers balancesheet

Pranab Mukherjee has righted the macro picture without slowing down economic recovery....

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Finance Minister Pranab Mukherjee had many objectives to juggle in this Budget. On the one hand,the governments expansion of spending that followed on from the global financial crisis had put pressure on its bottomline,and across India and the world stakeholders hoped that the Budget would mark a return to fiscal prudence. On the other hand,the momentum that India has managed to sustain through the global downturn needed to be given fresh energy,to propel India back towards a higher growth path. Mukherjee,handed this tough slate,has pulled together the political experience of two decades,and presented a package that manages to accomplish a great deal. More,that he began the Budget speech with a public reminder that government cannot do everything,that it must play an enabling role,that the animal spirits of Indias investors are crucial to growth,should be seen as a major reformist signal.

The macro picture first. This Budget scores on fiscal consolidation and tax reform. The Finance Commissions recommendations on reducing the debt/ GDP ratio by 2014 have been accepted and there will be a roadmap available in six months. An emphasis on time-bound targets is visible throughout this Budget,which might help towards creating a culture of accountability. The fiscal deficit/ GDP ratio is to be decreased to 5.5 per cent in the base estimates not that hard,since there are no Pay Commission arrears or debt relief for farmers this year. More important are the rolling targets that have been set: 4.8 per cent in 2011-12 and 4.1 per cent in 2012-13. The crucial takeaway: these are in fact add-ons to the Finance Commissions recommendations.

Add to this the decision long argued for by those who want a clean balancesheet from the government to include off-Budget items explicitly in deficit calculations. Another sign of conservativism: the disinvestment target is Rs 25,000 crore. But this should in fact be exceeded,if markets behave as most expect. When 3G auction receipts are added in,the finance minister should have no problems in attaining the deficit targets. Subsequent fiscal consolidation,however,will remain contingent on reforming subsidies. The Direct Tax Code and GST targets remain April 1,2011 and it was important to keep proceeding towards it; this was done by hiking excise to 10 per cent and/ or service tax to 12 per cent. The GST will be 12 per cent,with 7 per cent the Centres share and 5 per cent the states. That excise has been hiked,despite industry protestations,is welcome,though there is a little too much tinkering across sectors. The FM has made urban segments happy by realigning slabs though not rates on personal income taxation. On the flip side,there is the hike in the minimum alternative tax to 18 per cent,though this is offset by a reduction in surcharge. Overall: the tax proposals are revenue-neutral,with the shortfall in direct taxes paid up through indirect taxes. Given the constraints,the FM was expected to be evaluated on tax reform and fiscal consolidation. On that,he has certainly passed the test.

But correcting the macro picture couldnt be allowed to happen at the cost of slowing Indias recovery. So what have we got? Lets start with the financial sector. It would have been very easy for Mukherjee to continue to use the global financial crisis as an excuse to not even think about financial sector reform. Instead we have a commitment to create a financial sector legislative reforms commission,which will review our interlocking and confused financial regulation. And,in an idea imported from the latest post-crisis policy thinking elsewhere,a super-regulator charged with systemic stability will be set up. Then theres a commitment on financial inclusion again,with a date: March 2012. The opening up of accounts,and the spread of insurance services,is a crucial step towards revolutionising Indias use of its citizens savings. Additional licences for private sector banks also help move that forward. On the knotty issue of petroleum subsidies,there is little doubt that a wholesale reform of the administered price mechanism would have been a great addition to the Budget. While the Kirit Parekh Committees report was specially mentioned,and recommended to the petroleum ministry,for now there is a first step towards addressing the petrol bill the reaction to which shows how politically fraught the road ahead will be.

Overall,Mukherjee,by setting the government targets and dates and,not least,announcing a new agency that will independently evaluate the UPAs pet social sector programmes has embedded challenges for his ministry and

his government.