There is no coherent set of measures in the Union budget to address slowing real growth and the rising subsidy bill, the identified causes of fiscal failure.
Going into Part B of his budget speech in Parliament, Pranab Mukherjee complained that the life of a Finance Minister is not easy. He has everyone's sympathy there. That said, there were a number of features in the fiscal policy of the Government of India for the forthcoming fiscal year (FY13) which generated unease among those listening to him.
The fiscal deficit in the current year was widely expected to exceed the budget estimate of 4.6 per cent of GDP. In the event, it is higher by a good 1.3 per cent, at 5.9 per cent. Off-hand, I am unable to think of any other year in which the disparity between achievement and intent was so wide. What is even more remarkable is that a fiscal deficit for FY13 at 5.1 per cent of GDP is called a return to fiscal consolidation, when it is higher by half a per cent of GDP than what was budgeted for the current year.
The failure to meet targets is blamed on reduced tax collections owing to slowing real growth, and on the rise in the global price of oil from $ 90 a barrel as projected at the start of FY12, to $ 115 a barrel. But there is no coherent follow-up on these identified causes with what will be done going forward.
On the rising petroleum subsidy bill, all we have is a promise in paragraph 22 that Central subsidies will be restricted in FY13 to 2 per cent of GDP, which is still a whopping Rs 2 lakh crore. No further details follow on what will be cut and what protected within this overall ceiling. The need of the hour is for a clear link between the retail price of assorted petroleum products and the global price of oil, through an announced, and analytically defended, pattern of subsidies. This has already been successfully done for non-urea fertilizers, although we continue to hold down the price of urea, with terrible consequences for soil fertility.
The longer term challenge is for a concerted nationwide effort at providing effective intra-city public transportation, and at increasing the share of rail traffic in transportation of goods. There is a clear link to the rail budget presented two days earlier. The Union Budget offered a second opportunity to defend the first tentative steps attempted there to generate revenues for expansion of the rail network, but it was allowed to slip.
In the forest of 61 paragraphs dealing with the minutiae of innumerable indirect tax proposals, which felt more like a pre-reform budget speech, there were some that were consistent with the need to contain the petroleum subsidy, such as the switch to a fully ad valorem excise of 27 per cent on large cars. The hike could have been much higher, since these cars clog city roads and substantially increase the oil import bill by slowing traffic all round. What struck a discordant note was the hike in the basic customs duty on bicycles from 10 to 30 per cent, and on bicycle parts from 10 to 20 per cent. The interests of buyers of non-motorised vehicles should surely take precedence over the interests of domestic producers of these vehicles.
On measures to tackle slowing growth, the other identified cause of fiscal failure, there were some good measures scattered through the speech. Even more than the new Direct Tax Code, the Goods and Services Tax (GST) needs to be speedily enacted for economic integration of the country. The move to a negative list of services is in the right direction, but the hike in the standard rate of excise and service taxation to 12 per cent raises the Central stake in the eventual GST rate. What the states will have to say about that remains to be seen. Eventual agreement on the configuration of the GST will take a great deal of patience and political stewardship, but the expected completion of the information technology platform for the dual-track levy by August 2012 is a necessary and welcome first step.
There are a number of measures to deepen the capital market and encourage investment in infrastructure. Amendments to an assortment of financial legislation are listed for passage through Parliament, although it would have helped if the key direction towards which the amendments nudge the legislation in question had been described succinctly in the budget speech.
On infrastructure, the multi-headed hydra which obstructs real growth in India, there is a whole section of 26 paragraphs which seeks to remove key constraints in a number of areas, such as viability gap funding for public private partnership projects, supply of coal and other fuels for power generation, operation of tolled roads, and the high operating costs of airlines. But many of these measures to remove obstacles are distressingly discretionary in nature, thus making the sectors in question hang on the outcome of inter-ministerial groups and other such bodies. This is at variance with the broad objective of reform, which was to release the economy from the stranglehold of gatekeepers.
Infrastructure bottlenecks are removed not by new initiatives alone, but by persistence with initiatives introduced in previous years. In September 2010, a cess on coal at Rs. 50 per tonne was introduced to fund transmission lines for evacuation of electricity from renewable energy generation points to consumption centres. This has raised the cost of thermal generation, but we know nothing about whether the transmission lines intended came into existence at all.
(Indira Rajaraman is Honorary Visiting Professor at the Indian Statistical Institute, Delhi. She is a member of the Central Board of the Reserve Bank of India, and was a member of the Thirteenth Finance Commission.)