There were very few expectations from Finance Minister Pranab Mukherjee on the eve of the budget at least for two important reasons. The first one flows from the belief that the budget (still the most important economic statement of the government) exercise, to a large extent, can be correctly anticipated by large sections of the society.
Especially, specific sections are able to appreciate much better than ever before the budget features that interest them. In other words, not only the budget proposals but the constraints in which the Finance Minister has announced them have to be better understood.
For instance, the salaried class, which was looking forward to a higher tax exemption limit, has had to settle for a Rs.20,000 increase (from Rs.1.60 lakh to Rs.1.80 lakh). This class of assessees most probably understand why the exemptions could not have been higher. (The government's revenue considerations and the fact that the Direct Taxes Code, scheduled for April 1, 2012, or beyond will bring about a major overhaul of personal tax rates and exemptions).
Nobody denies that the budget process as indeed previously intricate government policies is becoming more accessible to the common man. That is as it should be. In other words, there is more transparency in the budget — through better dissemination of information — among others. Transparency moderates expectations.
The second reason explaining the absence of large expectations flows from the first. That the government is preoccupied with certain urgent tasks is well known. These include persistently high inflation and a widespread perception of governance failures. All other issues becoming secondary, there is no point in expecting any large munificence from the Finance Minister.
The budget has several proposals that directly or indirectly target inflation.
The Finance Minister plans to end this fiscal with a fiscal deficit of 5.1 per cent. The target for the next financial year is an even more ambitious 4.6 per cent. A reduction of such a magnitude is not possible unless there is a huge spurt in revenue or the expenditure is compressed. The current year's target is achievable because of a bonanza by way of 3G spectrum and BWA (broadband wireless access) auctions. Such windfall may not occur frequently. Hence, if the government is keen on reducing the deficit, it has to rely on other methods.
Expenditure
Total expenditure is budgeted to go up by only 3 per cent in 2011-12 as against the expected 19 per cent increase in 2010-11. One has to look at the individual expenditure items more closely to determine the extent of compression. Cynics may say that the planned reduction, if any, is only on paper or else a case of deliberate under budgeting. There could be some merit in this argument when one considers that the provision for subsidies to oil companies on the controlled petroleum products — diesel, LPG and kerosene — has been budgeted at Rs.24,000 crore, which will not be sufficient.
However, the other view is that the government while budgeting for less is keeping its policy options open. According to this view, tough and politically sensitive decisions will be taken after the forthcoming State elections are over. For instance, in the context of transportation fuel a decontrol of diesel prices, although indicated on cold logic, may not happen until later this year.
Whatever be the rationale, the budgeted lower expenditure, at the very least, shows the government's commitment to spend less and hence bring down the fiscal deficit.
There are other points that support this view. The borrowing programme for the next fiscal at Rs.3.43 lakh crore is only slightly higher than the Revised Estimates of Rs.3.35 lakh crore for 2010-11. In fact, the government has borrowed less during the current year, and the Budget Estimate was Rs.3.45 lakh crore. A lower public borrowing suggests that more money will be available for the private sector. With more money in the system, the Reserve Bank of India will get the much needed flexibility to vary interest rates to deal with inflation.
Tax buoyancy
The whole exercise of fiscal consolidation also hinges on the assumptions of buoyant economic growth and revenue collections. The Economic Survey has forecast a GDP growth of 9 per cent plus or minus 0.25 percentage point next year. The government expects tax revenue to grow by 18 per cent. Although the Survey expects the growth to remain buoyant even over the medium-term, recent slowdown in manufacturing and the comparatively lower GDP growth in the third quarter of 2010-11 (8.2 per cent and 8.9 per cent in each of the two previous quarters) cannot be ignored over the near term. Will the assumed tax buoyancy materialise in the event of a slowdown?
The government's inflation-fighting credentials are also seen in its reluctance to hike the excise rates, thereby not adding to the cost-push inflation.
There was a strong possibility that the 2 per cent reduction in excise duty that was announced as part of the stimulus measures would be restored. That would have been seen as one of the early steps towards the introduction of the GST. Quite obviously, no single objective, even one as weighty as inflation, would have guided the Finance Minister. As always a number of objectives — ensuring robust growth, sprucing up of governance, even preparing for the promised major tax reforms besides inflation — have mattered. Obviously these objectives are interrelated and hence no single item can be seen to dominate the Finance Minister's agenda.
