New Delhi: The Congress-led United Progressive Alliance (UPA) unveiled its farewell budget on Monday, avoiding the temptation to offer pre-election sops to voters while trumpeting the achievements of its five-year term and warning that economic pain could worsen in the next six months.
Balancing act: Pranab Mukherjee. Ramesh Pathania / Mint
Stand-in finance minister Pranab Mukherjee candidly admitted that a record slippage was likely to push the fiscal deficit, or gross borrowings, in 2008-09 to three times the level of its initial target of 2.5% of gross domestic product (GDP) after taking into account off-budget items such as petroleum bonds issued to state-owned refiners for selling fuel below cost.
He maintained that a big stimulus package would be required to revive growth in the Indian economy, but propriety demanded that this could only be effected by the next government, expected to take charge in June after the conclusion of general elections.
“We have weathered the crisis, but there is no room for complacency,” Mukherjee said in his budget speech in parliament, the first 45 minutes of which were devoted to detailing the government’s economic track record between 2004 and 2008.
The stock market reacted negatively and the Bombay Stock Exchange’s benchmark Sensex ended the day lower by 3.4% at 9,305.45 points.
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“This is an interim budget. I had constitutional constraints,” Mukherjee said after his speech, on his inability to unveil more far-reaching fiscal measures.
Accordingly, Mukherjee avoided any tax changes, but maintained or increased allocations to the government’s priority social sector programmes such as its popular National Rural Employment Guarantee Scheme.
All the main opposition parties criticized the interim budget. Communist Party of India (Marxist) politburo member and Rajya Sabha MP Sitaram Yechury alleged that the more than hour-long budget speech was only a “pre-election document”.
For most part, the budget documents showed that the government has been conservative in its revenue projections for 2009-10 in the wake of an expected shortfall this fiscal year, compared with last budget’s projections.
In contrast, Mukherjee has assumed a benign environment when making expenditure projections for 2009-10, despite expecting to overshoot the target in the current year by 20% to Rs9 trillion.
Tax collections, which contribute 87% of the government’s receipts, are forecast to grow slower than the economy, putting government finances under strain.
In the case of non-tax receipts such as the auction of 3G spectrum to telecom firms, the government estimates it will raise Rs20,000 crore in 2009-10; this is lower than the telecom ministry’s projections last year of receipts between Rs30,000 crore and Rs40,000 crore.
The strain is expected to show up in a 164% increase in the fiscal deficit, borrowings that bridge the gap between government expenditure and revenue, in 2009-10 to Rs3.32 trillion, compared with the current year’s budget estimate.
The fiscal deficit in 2009-10 is forecast to be 5.5% of GDP, and is based on the assumption that the international price of crude will not witness a spike.
Investors said they were worried about the impact of the ballooning deficit on interest rates.
“The fiscal deficit/GDP ratio of 6% in FY09 RE (revised estimate) and 5.5% for FY10 BE (budget estimate) may place pressure on interest rates unless accommodating policy measures are taken,” said Falguni Nayar, managing director, Kotak Mahindra Capital Co. Ltd.
According to Ashok Chawla, secretary of the finance ministry’s department of economic affairs, projections for 2009-10 have been made on the assumption that the average price of crude would be below $70 (about Rs3,400) a barrel for the year.
International crude is currently quoted at around $45 per barrel. The assumption rules out the possibility of public sector oil marketing companies registering under-recoveries on retail sales on account of having to sell below cost, he added.
In other words, the government has ruled out the possibility of issue of fresh oil bonds to finance under-recoveries.
Damp squib: Acting finance minister Pranab Mukherjee on his way to present the UPA government’s last budget, in New Delhi on Monday. Ramesh Pathania / Mint
Taking into account the Rs95,000 crore worth of oil and fertilizer bonds, the total outgo on subsidies increased by 330% over budget estimates to Rs2.18 trillion.
Political parties in the opposition had a mixed response to the ballooning fiscal deficit.
The Left parties said the government should have increased expenditure for employment generation and enhanced productivity without bothering about fiscal deficit.
Leaders from the main Opposition party, the Bharatiya Janata Party (BJP), were divided on their views on the interim budget. “We would have been happy if the interim budget had more productive measures to generate demand and provide stimulus for employment. But it is sheer wasteful expenditure,” former finance minister Yashwant Sinha said.
However, the BJP’s Arun Shourie, who also addressed the media along with Sinha and senior party leader Jaswant Singh, said that the fiscal deficit had tied the government’s hands for any stimulus measures.
Pointing out the India’s links with the global economy, Meera Sanyal, country executive (India) at ABN Amro Bank NV, said, “I don’t know if we have necessarily seen the shocks of global economy playing out.”
The impact of the global slowdown on the fiscal deficit has already put the government’s revised borrowing programme in a fix. On Monday, the revised borrowing programme for the current fiscal year showed the government plans to raise Rs2.61 trillion, against last year’s budget estimate of Rs1 trillion.
The borrowing programme is not yet complete, but the government has decided not to approach the debt market to raise the last tranche of Rs45,000 crore, as the size of its borrowing blunts the Reserve Bank of India’s monetary policy measures such as reducing interest rates.
According to Chawla, the government is yet to crystallize the manner in which it completes its borrowing programme for the year.
The current Lok Sabha is expected to be dissolved immediately after the ongoing budget session of Parliament ends on 26 February and the Election Commission of India is likely to announce the general elections soon after.
“The government appears to be in a state of complete denial on the impact of the global recession… It should have increased the expenditure and left the fiscal deficit to be handled by the next government,” Yechury said.
The opposition parties alleged that the interim budget failed to address the impact of the economic crisis across the world.
The BJP leaders also warned of “unprecedented economic crisis” due to a sharp fall in tax collections and the global economic crisis. “They have wasted four golden years of high growth and high revenue. They should have provided a strong roof to secure our economy.”
Jayanti Natarajan, Congress spokesperson, said: “The interim budget reflect tremendous success achieved by the UPA, especially in the social sector... It is a measure of its success that at a time of global recession, Indian economy continues to be resilient and holds out great promise of growth.”