Short-term pains for long-term growth. That more or less summarises Finance Minister Pranab Mukherjee’s budgetary exercise for 2010-11. The stimulus-aided economy is well on the road to recovery with an anticipated growth of over 7.2 per cent during the current fiscal, although at the expense of an unsustainable high fiscal deficit of 6.8 per cent of the GDP. The need of the hour was to return to the path of fiscal prudence while sustaining the growth momentum. And when the clamour for a partial roll-back of stimulus gained ground — mainly backed by the Prime Minister’s Economic Advisory Council and cautiously ratified by the 13th Finance Commission — the nation at large knew that it was coming. The people, the corporates as well as the bourses had already factored it in. All were prepared for a hike in excise duty to 10 per cent, as it was still lower than the pre-stimulus rate of 12 per cent.
But when it came, all hell appears to have broken loose, at least in the Lok Sabha when Mr. Mukherjee announced the changes. In an unprecedented move, almost the entire Opposition trooped out of the House in protest against the hike in customs and excise duty on petrol and diesel in view of its cascading effect on inflation and have given a call to the people to hit the streets. Ostensibly, no one had anticipated that the government would also touch the petroleum fuels, especially when the Kirit Parikh Committee recommendations still lack a political consensus within the UPA. What everyone missed out on was the fact that the cut in duties on petroleum goods was effected when crude oil in international markets was ruling at an all-time high of about $ 147 a barrel. Now that crude oil is ruling at nearly half its price, why should the government bear the wasteful subsidy, especially when the oil marketing companies are groaning under the burden. Sound economic logic, perhaps, but not politics.
What gave the courage to the Congress-led UPA government in its second term in office to seriously tread the path of fiscal consolidation and pave the way for a high growth trajectory is that this is its second budgetary exercise and no major elections are on the way. The opportunity can be gainfully utilised for ushering in bold systemic reforms, chart out the road map for revolutionary changes in direct and indirect taxes by way of the proposed Goods and Services Tax (GST) and the Direct Taxes Code, rationalise the mechanism of targeting subsidy to those who are needy and, at the same time, allocate enough spending on infrastructure development and farm sector growth and switch over to a transparent direct subsidy payment for the oil sector instead of off-budget transactions. He also ensured that public spending is not beyond means and as a result of which the government borrowings during the year is restricted to Rs. 3.45 lakh crore, a fact that has enthused the market and corporates.
True, that prices of cars, while goods and other household appliances have gone up with the roll-back in excise. But, alongside, he has tried to make up for this by changing the personal income-tax slabs which will help the aam aadmi and the middle-class to save enough during the year. The strategy, perhaps, is that the higher disposable income would itself propel growth through higher consumer demand or else lead to long-term savings through infrastructure bonds. A high savings rate is the best bet for any country as it offers long-term funds for infrastructure.
Armed with a strategy chalked out by the Finance Commission, Mr. Mukherjee has also budgeted for a mop-up of Rs. 40,000 crore during 2010-11 for spending on social sector programmes. Alongside, while raising a net revenue of about Rs. 20,500 crore by way of tinkering with the entire taxation regime, Mr. Mukherjee has also sought to ensure a return to fiscal prudence by pegging the fiscal deficit at 5.5 per cent of the GDP in 2010-11 and 4.8 per in the next fiscal year.
As for inflationary expectations, Prime Minister Manmohan Singh allayed fears saying: “You must look at the total picture emerging from the budget. The net revenue gain for the Finance Minister is only Rs. 20,000 crore. In an economy as large as India, this resource mobilisation effort should not trigger any inflationary expectation.
