The finance minister said while presenting Monday’s budget—his third since the UPA returned to power in 2009—that the number 3 was lucky for him. Like last time, he also invoked the blessings of Indra and Lakshmi—the arbiters, respectively, of rain and wealth. Both rewarded him in 2010-11, even as mortals in the government let the country down. It is no surprise then that the minister should count on lady luck and invoke divine blessings: only these can help him meet his budget deficit goals.
As a limited revenue and expenditure exercise, this budget is hardly the minister’s fault. He has shown a revised fiscal deficit estimate of 5.1% against the budgeted 5.5%, and has announced a target of 4.6% for the coming financial year. That the spectrum auction revenues yielded an inflow of more than 1% of gross domestic product (GDP), and hence the revised budget estimate should have been a lot lower than 5.1%, is not a charge that can be laid at his door. Rather, it should be laid at the door of either the elected UPA government or the unelected National Advisory Council, or both.
On the same day the budget was presented, the government also released the fiscal third quarter growth estimates. Gross capital formation fell by around 4% in nominal terms in the quarter ended December. In real terms, it should have fallen a lot more. This, however, did not show up in the numbers. But that is a different issue.
The salient message is that consumer and government spending are not ideal motors to drive growth. Our national savings rate has stagnated and Indian corporations are investing overseas. Net foreign direct investment (FDI) is barely positive, and even portfolio investors are suffering from indigestion, having had too much of the secular Indian growth story.
The recent Economic Survey noted that simply by adopting the best practices from Indian states (it conspicuously avoided naming them), the country’s standing in the global “Ease of doing business” rankings would improve 55 positions, from 134 to 79. Quite what the budget does to move things in this direction is somewhat unclear.
To be sure, the minister has at least one good thing going in each budget. Last year, it was the announcement of tax deduction on donations to approved funding vehicles to be set up by recognised political parties. This year, it is the announcement that direct cash transfers to the public for purchase of kerosene, cooking gas and fertilizers are to be implemented from March 2012. Better late than never, and better small than none at all. Further, it was good to see some concrete timelines for the implementation of the direct taxes code and the goods and services tax.
On the all-important subject of agricultural productivity, the minister had to content himself with an exhortation to state governments to rethink the Agricultural Produce Marketing Framework. Nor was there any mention of allowing FDI in multi-product retailing, or of fully decontrolling administered prices of hydrocarbon products. Again, these may not be within the minister’s remit, but some sort of a roadmap had been expected.
The minister has also promised action on pending legislation pertaining to his ministry. The fact that quite a few of these have been pending since the first UPA government took office in 2004 is indicative of the dysfunctional coalition governance that India has suffered from since then.
It was also difficult to figure out the government’s assumption on the price of imported crude oil in the new fiscal. Further, raising Rs40,000 crore through disinvestment is also contingent on the mood and sentiment in global, regional and local financial markets, and the prospect for the global economy. Suffice to say that it is far from assured.
On these assumptions rest the achievement of the finance minister’s deficit targets, including reduction in the absolute rupee amounts spent on providing major subsidies.
The budget may have passed the Google test of doing no harm, but the sense of urgency is missing on the part of the government. It is still waiting for a wake-up call.
V Anantha Nageswaran, chief investment officer for an international wealth manager.
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