The defining moment of the Union Budget presented by finance minister Pranab Mukherjee this morning came midway through what is called Part B, a presentation of the tax changes made in the budget. This was when the minister managed to transport everyone who was listening to his speech back to the 1980s by rattling off an almost unending list of products on which import duties had been reduced by 2.5 percentage points. The changes will likely do nothing for industry, the economy, even for the companies who import and use them. Like these changes, there are a lot of parts to the budget but, unfortunately, their sum isn’t larger than the whole. Indeed, they don’t even add up to a big picture of what the minister wants to achieve with the budget.
But first, the positives.
The constitutional amendment required to move to a Goods and Services Tax regime will be moved in this session of Parliament, said Mukherjee, and that’s a big step forward in terms of tax reform. An equally significant move is the proposed direct cash transfer that will replace subsidies in the case of fuel and fertilizer. The government’s decision to not borrow more from the market than it did last year -- which means it won’t crowd out other borrowers -- is another positive move.
The last is probably responsible for the sharp rise in the stock markets. The benchmark index of the Bombay Stock Exchange was up nearly 450 points at 2.10 pm. Some of the rise can also be attributed to the fact that Mukherjee didn’t roll back the fiscal stimulus announced in 2009. It was widely expected that he would, raising the excise duty on several products, including cars, from 10% to 12%, and because he didn’t, the markets rallied. The move may be good for industry but it isn’t particularly good economics, so we won’t count it as a positive. But we will take the innovation committee set up under the redoubtable Sam Pitroda as a plus, although it isn’t new and it remains to be seen whether this panel can foster innovation across government, industry, and academia by creating the kind of ecosystem India currently lacks. The announcement of another committee, to create a manufacturing policy that will see the segment’s contribution to GDP rise from 16% to 25% in the next 10 years also sounds good on paper.
With almost no change in the overall tax regime (the direct tax sops and the indirect tax gains sort of balance out), the finance minister expects the 25% increase in tax revenue he has budgeted to come from the dividend of growth.
That will allow him to practice the economics of populism, ensuring enough money to fund the government’s flagship development schemes, and to ensure a Rs1 trillion increase in farm credit.
The populism isn’t a problem. Our biggest grouse with this budget is that it refuses to acknowledge the real threat of a coming oil shock, does nothing to tackle inflation, and assumes that growth will provide its own answers without really doing anything to accelerate that growth. Its math is also a little suspect -- it assumes that subsidies will fall by around Rs 20,000 crore, while they increased by Rs 50,000 crore this year -- but we won’t quibble about that. Just like we won’t quibble about the myriad, albeit small sops, to West Bengal, Kerala, and Tamil Nadu, all states that go to the polls this year.