A lacklustre budget

February 28, 2011 11:13 pm | Updated November 17, 2021 03:39 am IST

Bereft of any big idea and with its focus on minutiae, the budget presented by Union Finance Minister Pranab Mukherjee disappoints as a political response to the perception of drift and the succession of scams that have emerged in the recent period. The Finance Minister has addressed desultorily three of the four problematical areas of political corruption, the play of unaccounted money in both the economy and the political system, Indian money stashed away in foreign accounts, and high inflation. He has been content with listing the ongoing efforts of the government in detecting and bringing back the money held in illegal foreign accounts, including negotiating tax information exchange agreements and double taxation avoidance treaties, its participation in international moves against tax havens, and the commissioning of a study on unaccounted income and wealth. Among the areas the group of ministers on corruption is examining are state funding of elections, the removal of the discretionary powers of government, and putting in place a competitive system of allocation of natural resources. Only on food inflation has the Finance Minister announced new initiatives and investments to increase the supply of specific food items such as edible oil, vegetables, pulses, and milk.

While the budget seems oblivious to the political context, on the positive side it will facilitate continuing high growth that is projected at 9 per cent for 2011-12. Its revenue-neutral character, the concessions in personal income tax and in corporate tax even if marginal, measures to boost investments in infrastructure and agriculture, the promise of pushing through reform legislation — including the constitutional amendment on the goods and services tax (GST), laws on insurance and pension funds and the new direct tax code — and information technology initiatives to streamline tax administration and the delivery of public services have had a positive impact on business sentiment. The introduction of an integrated GST will be a major move that will bring efficiency gains to the economy as a whole but there is still some way to go before all the States can be persuaded to get on board. The raising of the exemption limit for personal income tax from Rs.1,60,000 to Rs.1,80,000 has brought some cheer, even if it has fallen short of expectations. The lowering of the surcharge on corporate tax from 7.5 per cent to 5 per cent has boosted market sentiment, as have customs and excise duty concessions to specific industries. To raise revenue and also in preparation for the introduction of GST, the service tax net has been widened to include high-end medical and legal services even while retaining the rate at 10 per cent.

The budget has provided for significantly larger outlays on education, health, women and children, affordable housing, the Scheduled Castes and the Scheduled Tribes, and minorities. Overall social sector spending at Rs.1,60,887 crore will be 17 per cent more than last year, with the outlay on education rising by 24 per cent and on health by 20 per cent. The big idea of food security that was announced in the last budget is still to be operationalised with differences having cropped up between the National Advisory Council and the government on the target group, extent of coverage, and the estimates of the outlays that will be called for. One hopes that this very worthwhile programme will be finalised and put in place over the next few months. Mr. Mukherjee has announced the replacement of the present system of kerosene, LPG, and fertilizer subsidies by direct transfers of cash subsidies to people below the poverty line. It is true that in some contexts, typically in Latin America, direct cash transfers have transformed the delivery system, eliminated leakages, and ensured that the beneficiaries receive the full amount of the subsidy. But serious apprehensions have been expressed by progressive economists that in India, considering the extent of mass deprivation and the actual experience, cash transfers are becoming a substitute for — and even an excuse for weakening — the public provision of essential goods and services.

On the face of it, the government seems to be comfortably placed on the path to fiscal consolidation. The overall fiscal deficit is projected to come down from 5.1 per cent of the gross domestic product (GDP) in the current year to 4.6 per cent in 2011-12. With adjustments to exclude the capital expenditure incurred by the States out of the transfers from the Centre, the ‘effective' revenue deficit is expected to come down from 2.3 per cent of the GDP to 1.8 per cent. Yet, holding down the fiscal deficit may not turn out to be as easy as it is made to sound. If last year there was a bonanza from 3G spectrum auctions that provided headroom for higher spending, the Finance Minister has proposed to raise Rs. 40,000 crore through disinvestment in public sector units in 2011-12 even while holding out the assurance that the government will not relinquish majority stake or management control. In addition to the uncertainty over disinvestment, a major question remains over the impact of the food security legislation. Even on the limited scale that the government wants to launch it, an annual outlay of Rs.68,539 crore (or an additional Rs.11,500 crore over the current food subsidy) would be required. Another imponderable is the trend in crude prices that have risen sharply in recent weeks. Persistent high prices will leave the government with three difficult choices: increasing the retail prices of petrol and diesel, reducing the duties on petroleum products, and forgoing revenue or subsidising the under-recoveries of the oil marketing companies. Overall, it is not a budget that is calculated to capture the imagination of the country even as it has sought to maintain the growth momentum through minor tinkering. Many of the promised measures are not specific enough and are as yet for the future.

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