In an age of muted expectations, perhaps it was unfair to hope too much from the budget that finance minister Pranab Mukherjee delivered on Monday. But even by that yardstick, he disappointed. The budget, it is quite clear, was more an exercise to balance competing interests that dominate the economic landscape than to break new ground.
Consider, first, the congratulatory message of the budget—one that enthused the markets on Monday—the level of market borrowings, the good fiscal deficit number and strong tax buoyancy assumed in the numbers put forward by the minister. Each one of them can be questioned. At 4.6%, the fiscal deficit to gross domestic product (GDP) ratio would be considered as indicating fiscal consolidation. It is anything but that.
One key assumption behind this figure is that total subsidies—including those for oil products—will remain within manageable limits. It has been assumed that petroleum subsidy will fall by an astounding 38% over the revised estimates for 2010-11 to Rs23,640 crore. Similarly, it is assumed that fertilizer subsidy will come down by about 9% over the 2010-11 level. These are strangely optimistic assumptions to make. If anything in a time of galloping international crude prices, the subsidy burden is likely to rise—unless domestic fuel prices are aligned with international prices. If anything, the lack of planning for rising oil prices is a major weakness of the 2011-12 Budget.
Other subsidies in this list, such as food subsidy—which is expected to fall marginally to Rs60,573 crore—too make little sense, especially since the budget makes a promise to introduce the National Food Security Bill in 2011-12. Given the political pressure to roll out that measure, some of the added costs on that count are likely to add to this subsidy even its full financial impact will be felt only in 2012-13 onward.
If anything, the expenditure side shows signs of galloping: the combined spending on account of interest payments, subsidies and social sector spending adds to a tidy 45.5% of the total expenditure. The total expenditure in 2011-12 by itself will account for 14% of GDP. Yet, the budget abounds with less than believable numbers. This year, a new yardstick to measure the revenue deficit, the “effective revenue deficit” has been introduced. While the revenue deficit figure for 2011-12 remains unchanged over the current fiscal at 3.4% of GDP, it has been claimed that of this, roughly 1.6% is accounted for by grants for creation of capital assets and hence, the “effective” revenue deficit is lower at 1.8% of GDP. This will require some clarification before it can be accepted as a meaningful classification.
On the receipts side, there are some equally heroic assumptions. If the government has lost around Rs95,000 crore from non-tax revenue (mainly due to one-off items such as 3G spectrum auction money and disinvestment proceeds), it more than makes this up by a substantial rise in tax revenue (roughly Rs101,000 crore). The assumption behind this big number is a rather high buoyancy of corporate, income and service taxes. The danger in assuming this, of course, is that India will not face any external and internal shocks to its economy of the kind that it was subjected to in 2008-09. In an uncertain international economic environment, this assumption should have been tempered.
All this has not prevented Mukherjee from painting a “feel-good” picture in the budget. Was there any coherent message in the welter of schemes and sops that he announced on Monday? There was none to be found. There were bits and pieces of reforms that had already been initiated—the goods and service tax and the direct tax code being two examples—but no “big ticket” item. Given the beating that India’s image as an investment destination has taken lately, some signal, however attenuated, should have been delivered. It was not. Similarly, tackling inflation, especially food inflation, is not a quick-fix job, but requires sustained investment and innovative thinking on improving the supply situation. Yet, a look at the minister’s proposals for agriculture shows a thin spreading of money over schemes instead of a big-push in the sector.
Individual budgets may be over-vaunted relics of the past, but when stitched together on a year-on-year basis, they still can deliver a punch. A careful reading of Mukherjee’s speech shows close similarities (in structure, if not spirit) to what he said last year. If anything, this conveys an impression of business as usual, something the Indian economy cannot afford at this time.
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