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A troubleshooter’s budget

A troubleshooter’s budget

There is only one problem with the budget: it is not the finance minister’s budget. Instead, it is the United Progressive Alliance’s principle troubleshooter’s budget.

It seems that at some point in the past three weeks of hectic political-fixing, the many hats that Pranab Mukherjee wears got mixed up. And he formulated the national budget wearing the troubleshooter’s hat instead of the finance (thinking) cap! As such, this budget doesn’t have a economic game plan to address inflation, nor does it have explicit or implicit macroeconomic framework to spur growth. For that matter, it doesn’t even have a well-defined fiscal stance. There is no analytical basis to the fiscal consolidation even though the deficit has been budgeted to decline.

True to his wont, the troubleshooter seems to have gone about making the budget by identifying the most articulate and unhappy stakeholders. In the present political and economic situation, there are more than many of these. To start with, the urban middle class, or aam admi, is unhappy about inflation and shrinking purchasing power. On offer in the budget is relief in the tax burden on individuals to compensate for the loss in purchasing power. Never mind if an individual saving of about 2,000 a year (earning up to 5 lakh) or 22,000 (for earning above 10 lakh), is hardly going to make a difference.

Next in the queue of the disgruntled are the large corporates who have been facing a squeeze from all sides, be it the high rate of interest or the lack of availability of raw materials. On offer to placate them for a bit are quite a few things.

The budget goes out of its way to help the infrastructure sector with some well-meaning measures. By raising the amount that can be raised from tax-free bonds to 60,000 crore, Mukherjee has generated liquidity for infrastructure companies. The liberalizing of the eligibility for viability gap funding for public-private partnerships in infrastructure is a big promise that can go a long way to whet the private sector’s appetite for investments in this sector. With money in sight for this sector, the budget also addresses the price at which the money is available. By liberalizing the external commercial borrowing (ECB) regime, the budget has made it easier to access and use foreign borrowings. And the reduction of the withholding tax from 20% to 5% in sectors such as coal, power, airlines and affordable houses, will go a long way to make the costs structure better.

With power companies crying murder and escalating the issue to the Prime Minister and the banks throwing up their hands in distress in anticipation of impending power sector non-performing assets, it is not surprising that this budget makes a genuine effort to fix this sector. By allowing ECBs to be used for retiring rupee debt of power companies and earmarking 10,000 crore of tax-fee bonds for the power sector, a lot of the finance issues stand resolved for this sector.

The trouble in some sectors such as aviation has been fixed by promising a virtual bailout, be it by giving them specific permission to raise up to $1 billion through ECBs or stating that 49% foreign direct investment is under active consideration. Those in trouble can now seek some high-risk investors. This borders on the unethical. But far more unethical and potentially grievous to the system as a whole is the move seeking to amend the Income-tax Act from 1 April 1962 . This means the government has changed laws with retrospective effect. No law or policy will now be seen as sacrosanct. Then, in the troubleshooter’s world, you give some to take some to fix the here and now. To compound the short-changing of foreign investor through such amendments, the budget doesn’t have anything to say on the external economy. While it was fine when India was almost an autarkic economy in the 1960s and 1970s, to do so now is unacceptable.

With the current account deficit at a decadal high (even after adjusting for gold imports), the biggest risk to the budget comes from the external side. With crude oil prices more likely than not to rise, exports under pressure, imported inflation inching up, the currency is likely to see not just volatility but a downward movement. At that point, the internal fiscal imbalances will get compounded by an external account imbalance.

This goes on to show that this budget has a economic soul of the 1970s, fiscal spirit of the 1980s and political sensibilities of the 2010s. Which is why everyone is finding it a bit of a dull and uninteresting budget. Even though sensible in bits and bytes, for our times, it is a soulless, and spiritless budget.

Postscript: The fiscal deficit reduction seems to have been achieved by passing on some of the deficit to outside the general government. So even as the fiscal deficit is reduced, the public sector borrowing requirement has been increased: the raising of the tax-free bonds for 60,000 crore, by public sector entities like National Highways Authority of India, Indian Railway Finance Corp. Ltd, India Infrastructure Finance Co. Ltd, Housing and Urban Development Corp. Ltd, and others is as much a part of public sector borrowing requirement as fiscal deficit is for the system. As far as the macroeconomic implications are concerned, there is no difference between the fiscal deficit and the public sector borrowing requirement.

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