Taxes, spends in hope of growth

March 17, 2012 02:54 am | Updated 02:54 am IST - NEW DELHI:

If anyone was expecting the UPA government to go in for ‘big-ticket' reforms based on the seemingly aggressive stance of the Economic Survey the day before, Budget 2012-13 must have come as a damp squib on Friday. Finance Minister Pranab Mukherjee consciously chose not to bite the bullet but he sure had a feel of what the bullet looks like.

In a political environment where the rail fare hike proposed earlier this week is set for a rollback and the Railways Minister is likely to be shunted to the back benches in the days ahead, the bullet must have looked like a mortar shell to Mr. Mukherjee and Prime Reformist Manmohan Singh. In the event, the best bet for them was to present a pragmatic budgetary package with realistic numbers and feet so firmly rooted to the ground that it hardly looks as if they're moving.

Never before had such a package of negatives hit the economy at the same time. Even as the fiscal year 2011-12 was being seen as one of uninterrupted recovery, the economic scenario turned for the worse with heightened global uncertainty following the euro zone sovereign debt crisis, tepid economic growth in the U.S., spiralling international prices of oil and other commodities. As a consequence, high inflation and high interest rates dampened investor confidence while the subsidy outgo on oil, food and fertilizers far exceeded budgetary provisions.

A correction was on the cards but not at the pace that was being expected to attain fiscal consolidation. Instead, the budget seeks to accomplish the path of rapid, inclusive growth by pursuing five major objectives. With a focus on a domestic demand-driven recovery in growth, Mr. Mukherjee has tried to create conditions for a rapid revival in private investment while addressing supply bottlenecks in various infrastructure sectors. Alongside, while trying to speed up implementation of decisions pertaining to improvement in delivery systems, governance and transparency, he has chosen to address the problem of hunger and malnutrition, though seemingly not with the same degree of commitment or passion.

Multiple objectives

How has the Finance Minister decided to pursue these multiple objectives? First, as a token of relief from high inflation, and ahead of the Direct Taxes Code, he has provided relief in personal income tax and proposed measures to plug certain specific avenues of tax evasion. Incentive packages have been provided for a slew of infrastructure sectors to drive investment along with higher allocations for the farm sector. At the same time, he has sought to raise higher revenue through indirect taxes and tapped the services sector in a major way while hiking the excise and service tax levy from 10 per cent to 12 per cent.

Most important of all, the fiscal deficit for the coming year has been pegged at 5.1 per cent of GDP; Mr. Mukherjee's hope is that his budgetary package will lead to higher growth, which, in turn, will bring the deficit down to more comfortable levels.

The Finance Minister has earned the wrath of critics who say he has done nothing to reduce the subsidy burden, especially on diesel, food and fertilizer. But the fact is that the food subsidy cannot be curtailed even in the near future, especially given the government's political commitments to food security. Besides, any hike in the price of diesel, leave alone deregulation, would have been inflationary and politically infeasible. But indications are that the government would prefer to fight this out another day: the Prime Minister's Economic Advisory Council chairman has noted that diesel deregulation is very much on the government's radar. For the present, the subsidy elements have been capped.

Care has also been taken to correct the rising current account deficit by disincentivising gold imports by way of a higher tariff. In case this works, the volatility of the rupee would be largely taken care of and FIIs would find the market an attractive destination. Alongside, however, sops have been provided for greater retail participation in capital markets as the “hot money” FIIs bring can easily evaporate.

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