On a wing and a prayer

The Union budget for 2012-13 seeks to address two primary concerns — the economic slowdown and the unsatisfactory state of government finances — but the means it employs are so cautious, and even contradictory, that the chances of success appear slim. No doubt the fiscal space for stimulating growth, either by way of tax concessions or increased public expenditure, has shrunk. But that is no excuse for the lack of policy imagination. Last year, global factors — such as the eurozone crisis — and high inflation in India constrained economic growth. The economy which had grown at a relatively fast rate of 8.4 per cent in each of the two preceding years is expected to clock just 6.9 per cent during the current year, a rate of growth which, however, is still high by contemporary global standards. Drawing inspiration from the Economic Survey, Finance Minister Pranab Mukherjee expects growth to be around 7.6 per cent in 2012-13, moving one percentage point higher the following year. These might prove elusive. In any case, a narrow, obsessive focus on growth rates — including the decimals — can be counterproductive, especially because it is the quality of growth rather than the actual figure that is more important. Besides stoking inflationary pressures on the demand side, India's consumption-driven growth has come at the cost of investments which alone can sustain growth in the coming years.

On fiscal consolidation, the budget has wisely steered clear of an absolutist position which calls for a drastic fiscal correction as the only way to avoid a situation of low growth and high inflation. The Finance Minister hopes to contain the fiscal deficit at 5.1 per cent of GDP in 2012-13, lower than the anticipated 5.9 per cent during the current year. There are sceptics, to be sure, but given the need to increase social spending, a correction can take place only over an extended period. In any case, the sustainability of debt is not in question. Apart from introducing necessary amendments to the Fiscal Responsibility and Budget Management Act, Mr. Mukherjee has come up with two new concepts: “effective revenue deficit” and “medium term expenditure framework” to better target public expenditure. He will endeavour to keep central subsidies under 2 per cent of the GDP. The flip side to fiscal consolidation, of course, is that there has been no significant step-up in social sector schemes, though the government has yet to fully show its expenditure numbers on the Right to Food front. Indeed the food subsidy allocations in the current budget will not allow the UPA to roll out the sort of robust entitlements the poor in India need.

On the tax front, the Finance Minister takes more from the taxpayer than what he has given. The increase in basic exemption limit on personal income tax, though small, is still welcome. Yet the relief is undone by the increase in service tax and excise duty. Aside from the regressive effect that indirect taxes have on equity, the hike will push up the prices of all items of daily consumption and services for the common citizen. Budgeted revenue from excise duty will rise by 29 per cent while that from service taxes will go up by 30 per cent, providing a revenue cushion of sorts to Mr. Mukherjee. The abolition of duty on coal imports by power plants for two years is a welcome measure that will provide relief to power companies that have been hit by higher prices due to policy changes in the coal-exporting nations. Allowing power companies and airlines to use external commercial borrowings (ECB) to finance a part of their rupee debt and working capital respectively will help these sectors get back on track though the permission smacks of ad hocism. However, the decision substantially to increase the cess on domestic crude oil production is a retrograde move that is bound to have a cascading effect on retail fuel prices. Also retrograde was the one move not made: thanks to lobbying by the auto-industry, the Petroleum Ministry's proposal to hike sales tax on diesel-run motor cars as a painless means of containing the diesel subsidy did not find favour in North Block.

The decision to increase duties on gold is an interesting one that is aimed at curbing the rising import of the yellow metal which, according to Mr. Mukherjee himself, is pushing up the current account deficit. Import of gold and other precious metals has risen by 50 per cent in the first three quarters of this fiscal. An unstated aim of the move is obviously also to channelise public money into productive investment avenues that will help the economy. Gold is an idle investment that has no multiplier effect. A similar objective can be seen in the reduction in the securities transaction tax from 0.125 per cent to 0.1 per cent for cash delivery transactions on the stock market. As expected, the Finance Minister also signified his intention to introduce the General Anti Avoidance Rules as a counter to tax avoidance schemes. But Mr. Mukherjee might just have set off a storm over the proposed amendment to Section 9 of the Income Tax Act, allowing the government to reopen controversial transactions like the sale of Hutch to Vodafone. Plugging a loophole that allows companies to avoid capital gains tax is a good thing, even though the courts will likely have the final word given the amendment's retrospective effect. The days ahead will show if this will be the single biggest act of what was largely a dour budget.