Download copy for “deccan chronicle” of 07 07 2009

ECONOMY
COPY FOR “DECCAN CHRONICLE” OF 07 07 2009
BUDGET 2009-10 by S L Rao
Pranab Mukherji is known to be cautious, with limited vision, and a crafty
politician. He shows all these in this Budget. He spends huge amounts on the social
sector but does not say where the money is to come from. He does not have any plans
on disinvestment nor on revenue from the telecom spectrum sales. The fiscal deficit
for the country is well over 10% and probably worse if all off-budget items were
counted. He gives some much awaited sops to industry-apparently abolishing the
fringe benefits tax , and the surcharge on corporate income tax, raising personal
exemption limits a little, etc.
Pranab Mukherji is a longstanding Indira Gandhi loyalist. He is essentially a
politician who learnt his politics during a regime of command and control, public
over private investment, and income redistribution. In the Indira Gandhi years
therefore there was little entrepreneurship and growth. The Manmohan SinghChidambaram Finance Ministries, were focused on macroeconomic and fiscal balance
and eliminating many restrictions on industry, finance and international trade.
Investments in infrastructure, agriculture, health and education, improving the
targeting and efficiencies of expenditures especially for the poor, got little attention.
In the last government the influence of CPI-M and experts of the National Advisory
Council, led to more emphasis on employment for the poor, education and health.
Fiscal discipline was forgotten in the last three years despite a buoyant economy
and tax revenues. Fiscal deficits have been much higher than disclosed in past
Budgets and even in this one, may not fully account for what Mr. Chidambaram
called “below the line” items. Figures were fudged and may still be. Food and
fertilizer subsides were not fully accounted for, nor the bonds to oil companies who
were forced to keep retail prices low.
Many things were expected from this Budget. Tackling the effects of the global
economic recession, road to fiscal discipline, stimulating agriculture and its
productivity, building urban and rural infrastructure, reducing volatility of foreign
exchange inflows, substantially reducing waste and inefficiency in government
expenditures especially on infrastructure, health, education, employment guarantee,
subsides, etc, bringing greater accountability through administrative reform, and
reforms in election expenditure. Of these he has addressed many except fiscal
discipline, foreign exchange volatility, improving social and other government
service delivery, minimizing waste and increasing accountability in the
administration.
The Budget abolishes the fringe benefit tax, the 10% surcharge on corporate tax,
raises the MAT (minimum alternate tax), introduces investment incentives for a few
sectors to start with, and has help for labour intensive export industries. Social sector
and infrastructure expenditures are to rise substantially. Plan expenditures will rise by
34% over last year and by 37 % on non-plan (mostly due to the Pay Commission
recommendations). .
The Budget proposes simplification of tax structures, balancing out customs and
excise duties, etc. A committee will look at market orientation of prices of petroleum
and oil products. It is not clear if he means international markets which are controlled
by speculators, cartelized by large producers, and influenced by large consumers like
the USA with huge oil reserves and market influence.
The fiscal deficit is at 6.8%. The Budget permits states to borrow an additional
0.5% of SDP. The national deficit will therefore be a record 10.8 %. It does not say
how it is to be financed. The Finance Minister boasted that from an expenditure of
Rs. 193 crores after independence, this Budget will spend over Rs 10 lakh crores! He
has no timeline or road map to fiscal rectitude. .
The Budget does not say how the deficit is to be financed. It will obviously be from
substantially increased borrowings. Such borrowing will prevent private investment.
There will be no reduction in interest rates. The economy will, as in the Indira Gandhi
years, be again dominated by government investment.
The Budget speech does not also address the problem of volatile foreign
institutional investment flows. They have been mostly speculative, being exempt
from short term capital gains tax if they come from Mauritius.
There is no mention of disinvestments or of revenues from sale of telecom
spectrum. However, there is a rise in non-tax revenues of almost Rs 45000 crores
withoutdetails. Perhaps the cautious Mr Mukherjee has provided for but not disclosed
substantial disinvestment revenues and spectrum sales.
Schemes to improve opportunities for the poor are necessary but they must be
effective, not wasteful. Expenditures on them have increased substantially. For
example, food subsidy will rise by almost Rs 30000 crores, though it is not clear if it
counts the cost of the new Rs. 3 per kg wheat or rice for the poor. The national rural
employment guarantee scheme has an increased expenditure of 140%. The fertilizer
subsidy has been much misused in the past, and Mr. Mukherjee is to revamp it but
gives no details of how and when he will do it. Other social expenditures and rural
infrastructure also have big increases. There is mention of proper targeting and
minimizing waste. The Budget speech banks on the “unique national identity card”
scheme. But it will take years to fructify. Meanwhile the present huge waste on all
schemes will continue.
The Budget, with large additional expenditures by government, will draw funds
from the market and squeeze funds for the private sector. There is little prospect of
interest rate reductions. The global economy will not improve till 2010 and exports
oriented industries including I.T. and B.P.O. will remain under pressure. These
industries were a big cause of growth in the last 3 years. The rural sector will have
vast sums spent. A likely poor monsoon will diminish rural purchasing power. Urban
demand growth will remain low and private investment will not grow. Public
investment alone cannot give us 9 % growth. The target of 9% GDP growth cannot be
achieved.
The Budget is slipshod, not transparent and unlikely to stimulate the economy.
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