July 7, 2009 11:59:41 pm
Outside the Congress party and its allies,no one seems to like Pranab Mukherjees Budget,apart from those who gain from increases in personal income-tax exemption limits and elimination of surcharge. This includes capital markets. Such negative sentiments are based on unrealistic expectations. If con is antithesis of pro,Congress is the antithesis of Progress. For five years between 2004 and 2009,UPA-I introduced no significant reforms and the economy chugged along at around 8.5 per cent. That was before external financial crisis reduced real growth to 6.7 per cent in 2008-09. (Thats not quite what happened,there was hike in interest rates too. But one is talking about perceptions.) However,despite doing nothing,the UPA was voted back. Thats vindication of the UPAs economic policies,a mandate for continuity,stability and prosperity and inclusive growth. (With the BJP imploding and regional parties complicating matters,thats not quite what happened. But one is talking about perceptions again.) The emphasis on agriculture,NREGS (including Rs 100 a day entitlement),National Food Security,Bharat Nirman,empowerment of weaker sections,welfare of minorities and Unorganised Workers Social Security Bill,was therefore expected; perhaps even JNNURM,Rajiv Awas Yojana and NHDP. This left-of-centre positioning shouldnt floor us. Its the aam aadmi agenda.
Where will the resources come from? Rare is the Indian who objects to deficits now. Instead,the prescription (including from industry) is deficits are fine,as long as there is special dispensation and exemption for my sector. Isnt that what the rest of the world is doing? Not quite,because the Indian concern is with revenue deficit (not fiscal deficit),that is,composition of expenditure and off-budget items. Deficits have costs,both through inflation and high interest rate regimes. They stab you in the back,not in the front and somehow the former seems preferable. If thats the case,why are we now reacting adversely to a fiscal deficit of 6.8 per cent (share of GDP) and revenue deficit of 4.8 per cent in 2008-09? Figures may actually be higher,depending on what happens to GDP growth. Typically,budgets dont give figures on nominal (forget real) GDP projections. They have to be worked out backwards,from deficit figures. This is one of the first budgets that explicitly has a nominal GDP growth figure of 10.05 per cent,probably based on something like 7 per cent real growth and around 3 per cent inflation (as measured by GDP deflator,not CPI or WPI. However,note that though the basket of commodities and weights are different,GDP deflator-based inflation has moved in tandem with WPI.). Seven per cent real growth may seem optimistic,but isnt implausible,certainly in the second half of 2009-10. So-called green shoots can be seen.
Yes,6.8 per cent is bad,but we knew numbers would be bad. We knew FRBM had been diluted. We knew state government contribution to deficit would increase to 4 per cent (as share of gross state domestic product). With off-budget items included,this is perilous. But this was known and there almost seemed to be a national consensus that deficits were a good thing. So what are we upset about now? Perhaps the fact that while disinvestment has been mentioned,there is no specific target and this could have been used to make numbers more respectable. Instead,there is a tribute to bank nationalisation,and 51 per cent government equity retention in PSUs is mentioned. We knew strategic sales were out. We knew there would be minority (say 10 per cent) sales of equity and we also knew even this would run into a tangle. There would be disputes about whether the timing was right and whether profit-making PSUs should be sold. Having said this,is it tactically better to have a song and dance in the budget speech about disinvestment and take credit for numbers (which then runs into controversies) or do it quietly later (if at all possible)? Pranab Mukherjee has probably been wise in opting for the latter,including non-mention of auction of 3G spectrum. Notwithstanding hubs in Tamil Nadu and West Bengal,there are the DMK and the Trinamool to reckon with.
Were we expecting big-bang reform announcements,as has often been the practice in budget speeches since 1991? The budget speech may then warrant 9/10 by the chambers,but these promises often amount to nothing. Why mention FDI in telecom or civil aviation or opening up of pensions and insurance? It is far better to leave petroleum product pricing (including targeting of subsidies) to the ministry of petroleum and natural gas or convergence to the ministry of rural development. Having said this,there is some attempt to target subsidies,not so much through Unique Identification of India (we still dont know how this meshes with other cards like MNIC),but through nutrient-based fertiliser subsidies and PMAGY (Pradhan Mantri Adarsh Gram Yojana). The last can geographically target cross-subsidisation. However,do we mean villages where 50 per cent of the population is SC (as stated in the speech) or do we mean villages where 50 per cent is ST? The background is a situation where we still cant agree on a definition of BPL (below poverty line),the rural development ministry believing it to be double the Planning Commissions figures.
The real reason most people are upset is because they expected exemptions and those arent there,not beyond extensions of some that already exist. Exemptions and special dispensations are antithetical to a tax-reform agenda and in the elimination of FBT and CTT,surcharge removal for personal income taxation and investment-linked exemptions for companies,we do have movement towards standardisation and harmonisation. How does one justify exemption for housing as opposed to health or education? And if one wants GST from April 2010,with a Central rate of 8 per cent,we do need Central excise to increase and more service sectors brought in (such as legal consultancy). The deduction for electoral trusts is also the beginning of a good thing. Some tax reform is indeed contingent on the 13th Finance Commission recommendations. (Revenue neutrality of direct tax proposals seems dicey though.) Finally,if employment exchanges are privatised (state governments permitting) that wouldnt be a bad idea either.
I am glad the Budget isnt flashy and spectacular. It seems pedestrian. But given the constraints,it isnt quite that. I am glad capital markets and the chambers arent applauding. It is the kind of Budget we deserved and it is also probably the kind of Budget thats good for the economy. Despite public expenditure and the doubtful efficacy of Central universities in every state,there is nothing to kill green shoots.
The writer is a Delhi-based economist email@example.com
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