J Mehra: Hype versus reality

As happens with every Budget, the fog around it takes its own time to thin out. So, the real impact of the Budget became clear only later. At the macro level, it appears to be aiming at inclusive growth.

The Budget, which has proposed a hike of over Rs 55,000 crore in the overall expenditure, saw a quantum jump of 20.1 per cent in the expenditure on Central Plan. However, capital expenditure increased by just Rs 7,389 crore. While it formed 22.8 per cent of total expenditure in 2004-05, its share fell to just 13.4 per cent in 2006-07, indicating the deteriorating share of this quality expenditure in successive budgets. For instance, the Budget proposed a huge increase of 32 per cent on education, 30 per cent on health and 13 per cent in case of rural development, however, capital expenditure in case of all these heads is almost nil. In other words, in a nation where nine crore people are added to the population every year, not a single rupee will be spent on augmenting capacity in the areas of education and health care.

While there is an increase of 15 per cent in the overall spending on roads and highways, capital expenditure as a percentage of total expenditure has gone down from 48 per cent to just 33 per cent. In case of power, capital expenditure as a percentage of total expenditure has gone down from 53 per cent to 32 per cent. Apart from these two sectors, the spending on infrastructure sector has seen a decline of 10 per cent in the overall expenditure.

Therefore, though this Budget is likely to stimulate demand, the lack of a corresponding increase in the capital expenditure in areas such as infrastructure will be growth-constraining and will lead to higher interest rates and inflationary pressures in the economy.

The Budget did make some positive policy changes in respect of tax reforms, customs duty, excise duty and the inverted duty structure faced by industries such as steel, but major tax reforms were given the go-by. Also a lot of measures announced had red herrings attached. For instance, in case of customs duty, although the peak duty rate has been reduced, the imposition of the new CVD is likely to increase the number of different rates instead of reducing them. By raising the service tax rates, the Budget put an additional burden of Rs 11,500 crore on the consumers of these services.

The increase in the rate of MAT was another retrograde step in the process of overall tax reforms. However, the biggest surprise was the deletion of the exemption available for interest in infrastructure loans under sec 10(23) G. At a time when India's infrastructure seems to be bursting at its seams, this step will make capital for infrastructural projects more expensive.

No doubt this Budget did not do any damage to the economy "" but then it didn't do anything for fueling growth, either.

The author is Director, Essar Group. The opinions expressed are personal.