Mr. Pranab Mukherjee's Clever Budget
Posted on: 06 Jul 2009
Whatever the 24-hour TV channels may tell us, the stock markets are not the best judge of the quality of the Union Budget. So while share prices may have gone down sharply after the presentation of the budget, the fact is that Union Finance Minister Pranab Mukherjee has presented an extraordinarily clever package for 2009-10. In his first budget after 25 years he has (i) focussed on pushing up growth, (ii) allocated more for welfare programmes and at the same time (iii) kept on the agenda for the future the more controversial 'reform' measures.
The finance minister knows that the worst is not behind us in the global economic crisis. He has therefore built his numbers around trying to boost India's growth by stimulating domestic demand. How can that be done? Private investment in India is still worried about the global slow down. Hence Mr. Mukherjee has budgeted for a substantial increase in government expenditure. The budget proposes a 15% increase in total Plan expenditure, a 15% rise in the Central Plan outlay and a 13% growth in Central Plan capital expenditure. A fair amount of this expenditure will be in infrastructure (power and roads) and the social sector, and therefore should be welcomed.
One may have hoped for even larger increases, but these follow substantial hikes in the second half of 2008-09. Besides, Mr. Mukherjee had to think of where he was going to get his money from. When economic growth slows, tax revenue increases also slow down. In addition, governments give tax concessions to maintain growth. Both happened last year and the finance minister did not have room for much more.
One should only be grateful that he completely ignored the fiscal 'fundamentalists' who rule the media and hoped to rule policy-making as well. Mr. Mukherjee has not worried in budgeting for a fiscal deficit of 6.8% of GDP, more than double the 2.7% figure of 2007-08. When growth and people's welfare are at stake, the text books and advice from Washington must rightly be thrown out – at least for now.
It is true that the finance minister has even in these times given some tax concessions. But they do not amount to much. A little bit of exemption has been given in income tax. Two taxes that were costly to collect and yielded little – the Fringe Benefits Tax and Commodities Transaction Tax – have been abolished. He has done nothing much in indirect taxes, but these were cut sharply in the middle of last year to boost domestic demand in the middle of the slowdown. At the same time symbolism is important and there Mr. Mukherjee has failed. He has reduced the 10% surcharge on those who earn a taxable income of more than Rs. 10 lakh a year – i.e. on India's really wealthy.
Even as the finance minister has chosen to ignore what we can only call the 'market fundamentalists' he has not rejected their agenda. Mr. Mukherjee has made it clear that disinvestment in public sector undertakings is on the cards (though he has ruled out minority government ownership of banks), he has placed faith on the 'public private partnership model (which has not succeeded anywhere) and he promises to pick up later the task of reducing the fiscal deficit. So the reform agenda is in place – only the implementation has been delayed.
Finally, what of the states in this republic which is supposed to be a union of states? Unfortunately, state governments like Kerala will continue to be squeezed and their autonomy further reduced. The expansion of welfare schemes – largely the Centrally Sponsored Schemes – means the state governments will have to make their contribution to programmes which they have not drawn up. This will reduce the resources they have. The fiscal deficit ceiling for the states has been raised by a further 0.5 percentage point (from 3.5 to 4% of GDP), so they can borrow more. But this may mean little for them since at the same time, the slow down in total central government tax revenues means that the growth in the states' share of these revenues will also slow down next year.
Far too often in recent years, budget-making and presentation has resembled a circus. The budgets are made for the TV panels on that day and the newspaper headlines the next day. The media builds up to fever pitch what should be a mundane exercise, and the finance ministry has been happy to participate in the show. Mr. Pranab Mukherjee has chosen to break with the trend and the first reports are that he is being made to suffer for not making a budget for the media and the sound bite. The finance minister has chosen instead to gamble on using government spending to boost growth. Will it pay off?
The author is the editor of a political and economic weekly