Finance minister Pranab Mukherjee started off with a strong political philosophy statement that the role of this government was to create an enabling environment for growth and development and to strengthen investments in the social sector. For the first time, perhaps, this government openly acknowledged the importance of market- and private sector-led growth, and that public expenditure could not be expected to be the origin of gross domestic product (GDP) growth. He followed it up by allocating 37% of all Plan expenditure for the social sectors (perhaps a record), and outlined the concept of a welfare state by talking about the food security Act, the new schemes for the unorganized sector, relief in income tax for the lower slabs, and other concessions.
In parallel, in keeping with the strong pro-market, pro-liberal statement, he announced greater disinvestment in public sector undertakings, opening up of foreign direct investment (FDI) in retail, more private sector banking licences, and a complete overhaul of financial sector regulations. Simultaneously, petroleum product prices have been increased to bring them closer to the market, fertilizer subsidies have been rationalized, there are promises of enlarging FDI, and there is an impression that the government is now open to big private sector initiatives.
This new philosophy comes as a bit of a surprise, for the general impression is that the Congress party continues to be socialist in outlook. A criticism here could be that Mukherjee needs to provide public funds for the pro-poor programmes, and that has left him with little for other asset formation initiatives, and hence he is forced to rely on public-private-partnership (PPP)?models to give the country the required growth stimulus.
On the fiscal deficit, the Budget has delivered as promised, with the expectation of a fiscal deficit at 5.5% of GDP next year, down from 6.8% this year, and a road map of reductions for the next two years. More importantly, Mukherjee has subsumed below-the-line items such as oil bonds and food and fertilizer subsidy numbers—previously taken off the balance sheet—into the budgetary deficit, which indicates greater transparency and, indeed, a greater resolve to get finances in order. The government is also providing enough funds to recapitalize public sector banks, and there are no loan giveaways that would affect their balance sheets.
On tariffs, there is no new taxation, and there is only adjustment in the rates of taxes already being levied. The reduction in personal income-tax rates would be very welcome for the middle class, and there is no increase in service tax rates. Excise duty hikes are modest, and there are customs concessions for specific sectors in keeping with the budgetary practice of choosing winners for tariff benefits.
Altogether, this is a very mature budget, balancing requirements of growth with social sector spending, ensuring that inflationary pressures are not exacerbated. This is, indeed, the very kind of balanced mature document one would have expected from a seasoned person such as Mukherjee.
And yet, there is a feeling of opportunity missed, of things not done, and of shadows lurking. First, the increase in Plan allocation is very modest—just 15%—and given inflationary pressures, real increases (subtracting for the rate of inflation) would be even lower. Agriculture, for all the fanfare in the Budget, gets only around Rs400 crore more—surely a very modest number for such an ambitious programme. Increases in allocation for the national highways programme and even the National Rural Employment Guarantee Scheme are fairly small. The numbers indicated for revenue expenditure do not inspire confidence, and it is quite possible that these may have to be revised substantially upwards later—and this would affect the fiscal deficit.
Second, there is little delivery on promises. The launch of the goods and services tax moves to 2011, and so does the direct tax code. The road map for fiscal consolidation would be placed before Parliament only in six months’ time. There is talk of committees for the financial sector, regulators for coal, and a host of other bureaucracy to be grown.
There is no mention of the reform Bills pending in Parliament, and even the word “reform”, perhaps, is hidden away somewhere, difficult to find. Allocations continue to be used as a surrogate for action, and even the concern in the speech about poor public delivery systems has not led to any actionable programmes. Mukherjee said that more than 300 of the recommendations of the Administrative Reforms Commission have been implemented, but the citizen is hard put to locate improvements in administration.
On two important issues, inflation and employment, there is very little. He shares the concern with all of us that inflationary pressures are high—we thought he was the person to do something about it. The petroleum price increases will add to these pressures, as will the increase in excise.
Finally, there is relief in direct taxes and an increase in indirect taxes, quite the reverse of what India has been trying to do these last 10 years. Indirect taxes are retrograde, affecting the poor and rich alike—a mature economy should have a larger share of direct taxes.
S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at email@example.com