This budget is at best a holding operation. There are clearly some positives.
First, the growth rates, which are robust this year, look robust next year and the prognosis in the medium term, on gross domestic product (GDP) growth, looks positive.
Second, in terms of fiscal consolidation, we have done better than what had been promised. The quality of fiscal consolidation, however, is somewhat debatable.
This year, the fiscal target was easily achieved because of the unexpected windfall gains from third-generation (3G) spectrum allocation and the tax buoyancy fostered by the high rate of growth, for direct and indirect taxes. Next year, too, reliance has been placed on strong fiscal consolidation through non-tax revenue particularly, perhaps the reauctioning of second-generation (2G) spectrum and by way of a robust disinvestment programme, assuming, of course, that market conditions continue to remain healthy.
But what the fiscal consolidation lacks is a credible medium-term programme in terms of better managing the quality of expenditure, more than merely the quantum. This is something that even the economic survey had pointed out.
The finance minister hasn’t unduly tinkered with the tax rates, relying mainly on what the direct taxes code has promised to deliver, and hoping that when the goods and services tax (GST) comes into place, that would be the centrepiece of tax reforms. He has articulated at length, the present deficiencies of government, on the delivery mechanism for subsidy programme. The food subsidy Bill, when it is introduced in Parliament, could become the precursor to a poverty alleviation programme.
The architecture of the budget is contingent on what is promised in paragraph 34 of the speech—the rekindling of the reform initiative and the package of the legislations on insurance laws and related bits on life insurance, on the pensions fund regulatory development law, on the banking laws amendment Bill, on the State Bank of India subsidiary Bill and on the company law Bill.
It is true that many of these Bills were introduced at the time of the National Democratic Alliance (NDA) government, but they have been in the cold storage for long. While marks must be given for pulling them out from the cold storage, there is many a slip between the cup and the lip. The finance minister’s ability to get these Bills passed in Parliament, especially in the Upper House, would depend on his political sagacity.
Whereas the finance minister has expressed concern on the current account deficit and feels that it would get moderated, there is no credible roadmap on encouraging foreign direct investment (FDI), which, I believe, is the centrepiece of long term non-debt creating flows. The budget has nothing much on retail, on further relaxation of FDI caps or on additional changes in the regulatory framework for encouraging FDI flows. I would regard that to be something which is problematic.
Similarly, I would touch upon foreign institutional investment (FII) flows, which are of course, reversible. On the issue of satisfactory balance between growth rate and exchange rate management, and calibrating capital flows, to bridge the current account deficit, no credible policy has been outlined.
On prices, there is a lot of attention on what he proposes to do on agriculture by recognizing that exogenous circumstances remain unfavourable on behaviour of headline inflation. There, I do not see a risk mitigation strategy on crude oil, nor a credible plan, on how you improve, in the short term, the supply line elasticity on food and food related products. On the demand side, there has already been six rounds of increase in the instruments available with the Reserve Bank of India.
To get a better handle on prices of agricultural commodities, we need to get a better grip on supply side elasticity. There is a mention of some relief given for cold storage chains, but these will take time, and are, therefore, not credible in the short term. Also, financial provisions made for the eastern financial sector, at Rs 300 crore, remain modest. We do not see any silver lining in improving agricultural productivity, not only in terms of cereal crops, but in terms of other kinds of items in the consumption basket towards which consumer behaviour may have shifted.
Whereas the economic survey recognizes that given the incidence of inflation, millions of people could have slipped back into poverty, there is little or no mention in the budget of what is to be done to alleviate them, or for helping states like Bihar, which have shown remarkable initiative, join the mainstream.
On the whole, I would say that Pranab Mukherjee has sought to build on the economic strength of the continuing growth momentum and tax buoyancy, but a lot would depend on his ability to deliver on the various promises, especially legislative promises.
The budget is, therefore, a holding operation, in which, apart from holding on the arithmetic side, we must hold our judgement till we see how many of the promises, suggestions and hints contained in the budget are operationalized.
(As told to Aman Malik)