Writing a column immediately after hearing the Budget speech is not very easy. But it has been made a little easier this time, as there is a throwback to the budgets of the 1980s. The approach to Plan expenditure and public outlays is very similar to that followed in the 1980s—and very different from the one adopted in the 1990s, after the reforms started. The framework has been set to target major goals—50% reduction in poverty by 2014 (a millennium development goal), 9% growth, a social supply net, global quality education, energy security and universal primary health—not immediately, of course, but over the next five years.
To reach these goals, the government would do more of the same, incrementally, by providing greater allocation to existing programmes. There is, of course, focus on flagship programmes that have done well—the National Rural Employment Guarantee Scheme gets an allocation of Rs39,100 crore. There is an increase of 59% for the Pradhan Mantri Gram Sadak Yojana, additional funds for the Bharat Nirman scheme and enhanced outlays for the Integrated Child Development Scheme, female literacy as well as the announcement of a programme for social security for unorganized workers. There is a step up of 23% for national highways, another Rs5,000 crore for the railways and a significant increase in the outlay for the Jawaharlal Nehru National Urban Renewal Mission.
It’s easy to criticize this initiative, as the Sensex has. First, a lot of the spending and delivery is still in the hands of the states, and there’s no mention of how the additional funds will be used more effectively than before. The statement about improved delivery mechanisms hasn’t been fleshed out, and unless the government is serious about reforming the mechanics of governance, there is little hope that the additional outlays will result in better outcomes.
Second, and more importantly, issues high on national priority have not been given adequate financial support. Only Rs120 crore has been allocated to the national identity card scheme—a priority programme. Modernizing the police forces gets only Rs420 crore—and a substantial outlay is for police housing, not equipment and weaponry. The National Rural Health Mission gets only Rs350 crore, and so all biometric cardholders will have to wait a while to get their entitlements from hospitals. Next, there is little on agriculture barring greater credit—much was expected from the Budget for this sector. Finally, the fiscal deficit of 6.8% is a deeply worrying figure, and the revenue deficit of 4.8% is even more so.
At the same time, there are some nuanced approaches that indicate the finance minister has opted to push for growth. In the infrastructure sector, clearly, a lot of the play is in the hands of the private sector, and the Budget recognizes constraints to financing these projects. The initiative to grant the Infrastructure Financing Corporation much greater flexibility by allowing it to refinance 60% of all bank lending for infrastructure, providing take-out financing for asset-liability mismatch and increasing allocation for the national highways programme, provide a stimulus package for growth in infrastructure that is likely to speed up projects. There is a focus on textiles and construction, which have traditionally been employment-intensive sectors.
The removal of the fringe benefit tax is a great relief for companies, though the increase in minimum alternate tax has a dampening effect. The incentives on personal income-tax through the removal of surcharges, increase in the limit of exemption for personal income tax and relief for senior citizens, etc., are likely to put more spending power in the hands of the citizens. By not changing indirect taxes adversely, the finance minister has carried forward the benefits of the earlier stimulus packages for one more year—just as in the case of software exports.
There is also room for disinvestment receipts, though this was not clearly spelt out, but there is a provision of substantial additional revenues budgeted under non-tax receipts. There is also mention of a revision in fertilizer subsidies, through the introduction of a nutrient-based subsidy regime. These measures are likely to provide the minister with some fiscal space during the year.
There are some hidden market incentives as well—if the limit on non-promoter public shareholdings in listed companies is raised, one is likely to see a lot of investor activity that would be good for the markets. Finally, there is a promise of tax simplification—the new direct tax Bill to be tabled for discussion within the next 45 days and an approach to simplifying transfer pricing, both of which would be very welcome.
In short, there is an attempt not to do too much, but to steer towards greater growth within the constraints of the spending commitments. The time available is only nine months of the year, and so it is a calculated risk. At the end of it, the fiscal deficit may well turn out to be lower than projected—if growth returns and the monsoon does not play truant.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at email@example.com