Union Finance Minister Pranab Mukherjee's strategy of a partial rollback of the fiscal stimulus package in his Budget is not without its risks, given particularly the uncertainty over the external environment. Yet it is a measure of the government's confidence that the move to a higher growth path of 7.2 per cent this year and to a projected 8.2 per cent next year is sustainable even in the absence of the stimulus that it has reversed course and sought to raise Rs.46,500 crore through indirect taxes. Though this is offset partially by the direct tax concessions totalling Rs.26,000 crore, the net revenue raised, together with the expected buoyancy in a year of robust growth, has enabled the Finance Minister to keep the fiscal deficit down to 5.5 per cent next year. The real story of this budget then is not of any big idea or innovative strategy, but one of fiscal consolidation. There is the recognition that a sound and prudent fiscal management — with the deficits under control, and subject to gradual and targeted reduction over the medium term — has provided an enabling environment for the move on to a high growth trajectory. In a milieu where fiscal consolidation would be impossible while simultaneously increasing social sector spending and holding taxes down, the tax area had inevitably to yield. Overall, while an additional tax burden of Rs.20,500 crore is not too much for the economy to absorb, the impact of specific increases as, for instance, on diesel and petrol — the main target of protest by the opposition — is bound to be reflected in the price level.

Structural reform of the income tax system has been delayed with the new income tax code still in its formative stage. Meanwhile, income tax payers have gained significant relief from the broadening of the income slabs and from tax deductions for investing in infrastructure bonds and contributing to the Central Government Health Scheme. The cut in the surcharge on corporate tax from 10 per cent to 7.5 per cent is balanced with the raising of the minimum alternate tax to 18 per cent. Among the specific sectors, real estate that has been hit the most by the slowdown has been provided some concession. So have the medical equipment and mobile phone manufacturers, and the cinema industry. The restoration of the general excise duty to its original level of 10 per cent and of the duty on large cars and multi-utility vehicles from 20 per cent to 22 per cent would not be much of a burden. More significant from the point of view of impact are the revival of the customs duty of 5 per cent on crude and of 10 per cent on petroleum products and the hike in the excise duty on petrol and diesel by Re. one a litre. Even while it is reluctant to decide on raising the prices of petroleum products as recommended by the Kirit Parikh Committee, it has collected more in taxes and may well let the oil companies live with under-recoveries of the product prices.

As in the earlier budgets, much of the focus on the expenditure side is on social sector spending that now accounts for 37 per cent of the total plan outlay for 2010-11, while another 25 per cent is to be spent on rural infrastructure. The United Progressive Alliance's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme has been allotted Rs.40,100 crore and the Bharat Nirman programme of building rural infrastructure Rs. 48,000 crore. In addition, the allocations for health and housing — rural and urban — have been increased. Higher allocations are no doubt needed in all these sectors, but what is missing is the effort to strengthen the delivery mechanism at the ground level though the institutional weaknesses in the government structure have been identified over and over again. The suggestion made in the Economic Survey for moving away from subsidising the foodgrain prices in the public distribution system and instead providing coupons directly to the families below the poverty line so that they can buy food from the open market is no doubt too radical for the budget. Yet, in the case of fertilizers, the government has adopted the nutrient-based subsidy scheme and it even talks of moving towards a system of direct payment of subsidies to the farmers. This is an area in which it has to move with caution lest the inevitable increase in fertilizer prices should prompt the farmers to use less of the nutrients, thereby affecting farm production. The right to education bill passed last year is still to make its impact felt and the Finance Minister has increased the allocation for upgrading the quality of school education, to which every child in the 6-14 age group would be entitled. The right to food, the big idea that emerged from the last budget, is still in its formative stage, with the draft bill almost ready for circulation and debate. The government's dilemma on how inclusive that right should be — whether to adopt the conventional poverty line with its lower figure of poverty or the higher estimates that expert committees have come up with more recently — and the attendant cost seem to be holding back its roll out.

Notable in this budget are the moves on reforming the financial sector. New banking licences are to be issued by the Reserve Bank and eligible non-bank finance companies are to be allowed to convert themselves into banks. The global financial crisis has shown up the systemic weaknesses of financial regulatory institutions the world over. Drawing a lesson from this experience of the advanced financial markets, the Finance Minister has proposed a Financial Stability and Development Council to exercise macro prudential supervision over the economy including over large financial conglomerates, and to coordinate the functioning of multiple regulatory agencies. Overall, the budget has had a positive impact on business sentiment and the animal spirits of the market.

Correction

The second paragraph of “A delicate balance” (Editorial, February 27, 2010) was “… The restoration of the general excise duty to its original level of 10 per cent and of the duty on large cars and multi-utility vehicles from 20 per cent to 22 per cent would not be much of a burden.” The General excise duty increased by just two percentage points from eight to 10 per cent. The original level is 14 per cent. The Finance Minister announced only a “partial roll-back”.

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