Tame interim budget reflects realities

ATTENTIVE: Captains of industry taking notes of the budget speech of Finance Minister in New Delhi recently.

ATTENTIVE: Captains of industry taking notes of the budget speech of Finance Minister in New Delhi recently.   | Photo Credit: — PHOTO: RAMESH SHARMA

If the government had wanted to moderate expectations from the budget, it could not have done better than what it did this time

The interim budget is noteworthy for its transparency on the state of public finance.

By all accounts the interim budget 2009-10 presented by External Affairs Minister Pranab Mukherjee, who holds charge of Finance, on February 16 was a lacklustre one. The Minister played by the rule book: merely fulfilling a constitutional requirement of parliamentary approval for expenditure in the interim until a full budget is presented.

In fact few had expected the budget exercise to be a high-profile event. That explains the very few commentaries and expert opinions, TV shows and the like during the run up to the budget. The stock markets too remained relatively quiet before the budget although they slumped soon after.

Sober affair

Also, this time there was no Economic Survey placed before Parliament. In a normal year, the Survey along with the railway budget, both presented days before the Union budget, increase the tempo of pre-budget discussions. The Survey is a report card on the economy but on the eve of the budget it becomes an invaluable source material for anticipating the Finance Minister’s proposals at the last minute.

There were other reasons too why the budget was a subdued affair. The Indian economy has been slowing down quite rapidly. News of increasing unemployment is sinking in. Until November or so, inflation was a major issue threatening to alter the political landscape. Most important of all, unlike anytime before, the average citizen has been made aware of the economic situation at home and abroad. In fact the global financial crisis has become a subject of everyday conversation in India although its ramifications may not be quite understood (Who understands them anyway?).

The stock markets are engaging the attention of ordinary people though for reasons entirely different from those during the monstrous bull run that abruptly ended just over a year ago. At that time the markets were for making money, spreading the equity cult and, for some at least, amassing paper wealth. Today’s stock markets convey nothing but gloom. Days before the budget there were TV commentators who were debating the possibility of the indices — the Sensex and the Nifty — going down by another 30 per cent.

If the government had wanted to moderate expectations from the budget, it could not have done better than what it did this time. By not exaggerating India’s growth story or corporate performance, it seems to have conditioned the stock markets into accepting the interim budget for what it is. True, the stock indices went down soon after the budget speech. But a decline was waiting to happen anyway, led by global cues.

The style of the Finance Minister and the substance of his speech both ensured that the markets as well as ordinary people view the budget exercise rationally.

No announcements

All this, however, is not to say that the Finance Minister could not have done more. One significant feature of the budget presentation this time is the absence of major policy announcements that have characterised all previous budget speeches. Never mind that most of them did not have immediate fiscal implications and hence need not necessarily be part of the budget speech.

Like his decision not to interfere with the tax rates, the Finance Minister was guided by the fact that it is for the next government after the elections to make policy announcements.

However, Mr. Mukherjee did mention 11 medium term objectives for policy makers. These, according to him, would guide the fiscal and other macro economic policies in the years to come.

Apart from the large investments in the UPA Government’s flagship programmes, the budget does not have anything substantial on measures to stimulate the economy. The National Rural Employment Guarantee Scheme will get Rs. 30,100 crore and the Integrated Child Development services Programme Rs. 6,705 crore.

Despite the obvious need to develop infrastructure, the budget did not have anything special in this area. Merely recognising the existence of an infrastructure gap is a poor substitute for making some kind of vision statement in infrastructure.

No doubt the interim nature of the budget was a constraint but the urgengy of stepping up infrastructure development is beyond the pale of politics and nobody would have objected to some grand statements of intent.

The Finance Minister has not glossed over the true state of public finance. Both revenue and fiscal deficits have gone up substantially.

The revenue deficit has been estimated in the budget at 4.4 per cent of GDP, sharply higher than the one per cent estimated for 2008-09. The fiscal deficit is also higher at 6 per cent of GDP.

The budget estimate (for 2008-09) was 2.5 per cent. If off-budget subsidies (on petroleum, fertilizer and others ) aggregating to almost Rs. 96,000 crore or 1.8 per cent of GDP are taken into account, the Centre’s fiscal deficit rises to 7.8 per cent.

With States allowed to loosen their purses, their contribution to the deficit is expected to be another 3 per cent.

Taking all these — the Centre, the States and off-budget liabilities — the consolidated fiscal deficit rises to 10.8 per cent of the GDP.

If further proof of the absence of fiscal space is needed, one has to look at the shortfall of nearly Rs. 60,000 crore in the gross tax revenue of the Centre from the budget estimate for 2008-09. The shortfall for the Centre is Rs. 41,180 crore.

Therefore, absence of fiscal space as much as a sense of propriety has held back the government from introducing significant stimuli or, for that matter, any spectacular announcements.


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