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Business News/ Home-page / Budget 2008 | Will it win votes, and who will pay for this spending?
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Budget 2008 | Will it win votes, and who will pay for this spending?

Budget 2008 | Will it win votes, and who will pay for this spending?

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Finance minister P. Chidambaram bet on a series of quick fixes and a generous socialist-era style mega handout to farmers to try and address two challenges facing the government: ensuring that the 2008 Budget does enough to get the Congress-led United Progressive Alliance (UPA) back to power and stimulate demand in an economy reeling under the impact of a regime of high interest rates.

The only long-term oriented initiative in the Budget is skills development, which along with a social safety net initiative, appears clearly designed for inclusion of the poorer sections of the populace.

THE RUPEE FLOW (Graphic)

At the same time, Chidambaram has bequeathed a fiscal problem to the next finance minister—or rather, two key fiscal problems. The first concerns the Rs60,000 crore farm loan waiver. The second has to do with the fact that the finance minister is reporting below the line transactions, such as oil bonds, and has asked the 13th Finance Commission for its view on how these and the ones accumulated ov-er the years are to be treated.

Reverting to a pro-poor image, the finance minister passed up on various demands of Indian companies, kept economic reforms to the minimum, such as a token smart card scheme to tackle leakages in food subsidies, and then raised taxes on short-term stock market transactions.

The political reaction was swift, as opposition parties tried hard to regain the initiative that the UPA appears to have clearly grabbed with a pro-farmer Budget.

(Malay Karmakar / Mint)

Dubbing the Budget as an “election manifesto", BJP vice-president Mukhtar Abbas Naqvi said, “it is a clear signal that elections are being held early."

Non-political observers found the Budget somewhat “predictable".

“In agriculture, the loan waiver will not provide any boost, but, then, agriculture is a state subject and the Centre can’t do much. In infrastructure, the government can’t spend beyond a point and the private sector has to step forward. Moreover, the solution to a lot of our problems today lies with monetary policy," said M. Govinda Rao, director, National Institute of Public Finance and Policy.

The finance minister was, however, dismissive of these charges and said in a post- Budget interview: “If you have nothing else to say about the Budget, then you can call it election-Budget," he said. “Are you for the farmer or are you against the farmer? If you have the courage to oppose debt waiver scheme, stand up and be counted. You cannot duck the issue."

In addition to the debt waiver for the core constituency of all politicians—farmers—the minister extended a mixed bag of tax reliefs, including cheaper entry-level cars for the urban middle class and an increase in income tax exemption limits.

He also offered a demand stimulus to the economy by cutting CENVAT, or central value added tax, duties from 16% to 14%. In addition, he lowered duties on a range of commodities, including small cars, buses and two- and three-wheelers.

The minister is betting that the loan waiver will put money in the hands of the farmer and thereby provide additional impetus to consumption.

The finance minister projected the government’s annual gross borrowings, or fiscal deficit, in 2008-09 at 2.5% of gross domestic product, compared with 3.1% in 2007-08.

Together with the Railway Budget, which had a strong dose of populism targeted at the train commuter, it is a signal that the UPA is not averse to an early general election though that decision could be precipitated by the politics of the allies of the UPA, particularly the Left parties.

The only section that the minister chose to disappoint, after he effected a 50% increase in short-term capital gains tax to 15% and raised the tax burden on equity sales, were foreign institutional investors and the high net-worth individuals in the stock markets. Not surprisingly, the Bombay Stock Exchange’s benchmark index, the Sensex, lost 245.76 points and closed at 17,578.72.

While this may be the case, it has only reinforced the aam aadmi (common man) image that the Budget has sought to convey. All the more since the minister has followed up with income-tax concessions to individuals that would lower the annual tax burden by Rs14,000 of those earning less than Rs2.5 lakh and by Rs44,000 for those earning more than Rs5 lakh.

Even while it sought to inject a feel-good factor, the Budget has also sought to provide a quick boost to demand by reducing excise on a range of commodities. The UPA’s sense of urgency has probably been prompted by the rapidly altering outlook for the economy.

In fact, even as the finance minister was presenting his Budget, two sets of data released by the Central Statistical Organisation, the apex statistical body in the country, showed that inflation, based on the wholesale price index, had risen to 4.89% for the week ended 16 February, an eight-month high, and the growth in the economy, measured by the gross domestic product, for the three quarters ended 31 December, had dropped to 8.4%, the lowest since the last quarter of 2005.

(Udit Misra of Mint and Bloomberg contributed to this story.)

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Published: 01 Mar 2008, 01:05 AM IST
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