Some announcements in the Budget are in line with media and analysts’ expectations. At the macro level, it is heartening that the fiscal as well as the revenue deficit targets for 2007-08 are being met. The 2.5% fiscal deficit target for 2008-09 as well as the reduction of revenue deficit to 1% continue the path towards fiscal consolidation. For the first time, however, there is recognition that the off-budget subsidies, such as oil, food and fertilizer bonds, constitute “real liabilities” and need to reflect in government accounting. Finance minister P. Chidambaram’s statement that he would request the 13th Finance Commission to revise the road map for fiscal consolidation is a bit worrying, signifying that the growth flexibilities he has had in the past are eroding and that he needs to be careful about his expenditure.
Actually, he has. The growth in the gross budgetary support is only 16.4%—a low figure if one considers the 19% increase granted between 2002 and 2004, the even higher growth in budgets before that period and the even higher increases after 2004. Allocation of only Rs10,000 crore under plan ‘B’ for plan capital also indicates there won’t be much more money for the 11th Plan available during the year. This must be disappointing to the Planning Commission. Still, focus on controlling inflation and on growth speaks of prudent management.
There are several positives. Most important are the indirect tax initiatives. Keeping the peak rates of customs duties in an era of an appreciating rupee is sound judgement. Excise duty reductions as well as targeted decreases in two-wheelers, paper, pharmaceuticals, etc., are intended to strengthen the growth sectors in Indian manufacturing. There seems to be a message here. Corporate tax rate changes affect companies, owners and shareholders—indirect tax cuts help industry to grow, and the choice of the latter is an attempt to spur growth.
At the same time, the personal income-tax concessions are measured, welcome and not overboard.
The big news is in agriculture. The waiver of loans for small and marginal farmers, at an announced cost of Rs60,000 crore, is an important relief and makes the sector viable again. The investments in irrigation, food security, agricultural production and productivity as well as fresh infusion of capital?are?likely to give fresh growth impetus?in?this sector.?The worry is that there?is?no?clarity?about?where?this?money is to come from. If the government is to reimburse the banks over three years, as has been clarified, then there would be a budgetary burden as well as a burden on the banking sector.
The focus on education and health was also anticipated. However, the investments proposed in secondary education are fairly modest, and the major increase is happening in midday meal schemes—a consumption expenditure rather than investment. It is interesting that there is repeated mention about schemes for SC/ST and for minorities—indicating a real concern for these vote banks. That perhaps accounts for the announcement about a large number of fairly small schemes, carefully distributed over the geography of those states that are definitely going for elections this year, and those that are important allies of the United Progressive Alliance.
Such minutiae are hallmarks of state budgets, not the government of India’s budget, and the shadow of the election is obviously looming large.
There is, however, a sense of disappointment. There is no mention of infrastructure. The Budget does not address any of the issues raised in the Economic Survey tabled only the previous day. The survey points out the crying need for reforms—there is little in the Budget speech, not even lip service to the recommendations made therein. There is little comment on the unfinished agenda in banking, financial markets and insurance. There is no information on how the pressure of capital inflows would be managed, though there is a threatening mention of “short-term measures”. It had been expected that there would be a sovereign wealth fund created, which would help Indian investments overseas—but this hasn’t been announced.
Important concerns have been met halfway, tentatively. There is crying need for upgrading skills—the suggestion is to form a new entity whose role and task is uncertain. Irrigation is a great initiative—but with inadequate funds provided. Climate change concerns are voiced—and left to a permanent body to be constituted in the future. Corporate bond markets are important, but there is no finality about how this is to be achieved. Short-term capital gains are to be taxed more and the securities transaction tax is to be treated as an expenditure, not as a part of tax paid—an additional burden.
It’s fairly clear that elections are not far away, and it is now possible to speculate that they could be sooner, rather than?later.?The?Budget leaves the opportunity to carry forward?the promises in?the?new government,?while making tantalizing promises for the future.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at firstname.lastname@example.org