Transcript of chat between Business Standard chairman TN Ninan (TNN) and editor AK Bhattacharya (AKB)
TNN: Ashok, are you logged in?
AKB: Yes, I am logged in.
TNN: My first thought is that the finance minister has followed in the steps of the railway minister, and has taken the difficult step of raising excise rates and spreading the service tax wider, in an effort to control the deficit.
AKB: I agree. Service tax changes, including a rise in the rate and the rise in the Cenvat rate, indicate a direction towards the goods and service tax rates. But on the other hand, the Budget is disappointing in dishing out some expenditure side numbers that appear suspect. I am referring to the Budget's assumptions on petroleum subsidy.
TNN: There is a big hole in the Budget because nothing is being said about petroleum product prices. That has sent this year's deficit skyrocketing, and if you don't do something about it soon, next year's numbers could go out of line too.
AKB: Indeed, even the UPA's food security bill seems to have found no support from Pranab Mukherjee's food subsidy numbers. There is a very small increase in the food subsidy bill of a couple of thousand crores of rupees.
TNN: The interesting thing about the nature of the deficit next year is that the revenue deficit is being controlled quite sharply, though I am not clear how he is doing it. If the overall deficit is still high at 5.1 per cent, the bulk of it is because of a sharp step-up in capex. I think this answers the question on what the Budget offers for growth, because he is raising capital expenditure. The rider is that quite a lot of it is on defence!
TNN: The most important thing for accelerating growth is to drop interest rates. The Budget does not help on this front, because the government's market borrowings are going to go up further. In the next two years, they will go up nearly 50 per cent. I don't see how much interest rates can soften in that scenario.
AKB: Well, the numbers on fiscal deficit look a little suspect for another reason. The reduction in fiscal deficit for next year over this year's revised numbers is only about Rs 8,000 crore and this will be more than neutralised if the government fails to contain the petroleum subsidy bill to Rs 48,000 crore. This means oil prices have to go up during the year. How, we do not know. So, the numbers in this Budget do have some nasty surprises.
TNN: In terms of realism, I think the revenue assumptions for next year are not unreal. The problem is that the government will be spending 15 per cent of the GDP, when its gross tax revenue (of which some goes to the states) is only 10.6 per cent. Basically, the government should be spending a little less.
AKB: On the non-tax revenue side too, the finance minister has assumed an income of over Rs 58,000 crore from spectrum or telecom licence sales. If that does not materialise, given the uncertainties associated with such an initiative, the government's fiscal consolidation plan will face another setback.
TNN: I also find the equanimity on the external risks hard to understand. First, you have the possibility of oil prices climbing further because of the Iran situation. Next, the current account deficit (on trade in goods and services) will be close to 4 per cent of GDP this year, when the safe limit is about 2 per cent or a little more. Third, short-term borrowings have gone up quite sharply over the past year, so the volatility of movements of capital could be quite large. Finally, exports have beco
TNN: Talking of spectrum sale, what about disinvestment? This govt has never managed Rs 30,000 crore disinvestment in a year. Why should we think it will manage it next year?
AKB: On the positive side, the Budget has the service tax initiative. This is a good move, but there are questions over the manner in which exemptions have been granted using discretion — the way governments used to function in the pre-reforms era. Why have a negative list and then create another list of exemptions? The objective is not very clear.
TNN: The way I see it, the government has used up its two big revenue initiatives. One is the switch to a negative list for service tax, the other is jacking up excise to 12 per cent. At most, there could be one more tax hike in a year or two down the road, when the GST is introduced at about 14 per cent. Having bitten the bullet on tax rates, I don't see enough of a pay-off on deficit reduction. It comes back to the government spending too much.
AKB: What may cause some concern on the external front is the Budget's encouragement to more external commercial borrowings to meet the funding requirements of many sectors. With over $140 billion of short-term external debt, the move to allow more industries to access the ECB route may be another area of concern.
TNN: From the growth perspective, we have ended the 11th Plan with an achievement of just under 8 per cent. The first year of the 12th Plan is beginning with an assumption of 7.6 per cent. The trend rate of growth therefore is now below 8 per cent, which is what the country should get used to. That is a good rate of growth, especially since the global economy is not in great shape and even China is slowing down. So, we should stop looking for the 9-10 per cent that people used to talk about. It won't.
AKB: The finance minister has clearly stayed clear of all politically controversial moves. FDI in retail or the aviation has only found a cursory mention. It has given some sops to the individual tax payers and also raising the duty-free baggage allowance for Indians returning from an overseas visit. It is a Budget that has stayed clear of controversies, undertaken reforms where there will be least resistance and relied on the hope that it can raise petroleum product prices during the year.
TNN: OK, Ashok. Have to sign off and get down to work for the paper! Bye for now.
AKB: Bye, Mr Ninan. Great to have you on the chat.