This is P Chidambaram's eighth Budget, the first having been delivered 17 long years ago. No other finance minister has presented more, or watched budgeting at close quarters for more than two decades. The experience shows; he has displayed a sure touch in pressing the right buttons, and in not putting a foot wrong. While he has not passed up the opportunity to play to the gallery - with gimmicks like the women's bank - the fact is that there is little in the Budget that is overtly election-driven, and a great deal that addresses immediate economic priorities. One only has to compare this with the last pre-election Budget, of 2008, to see the difference. If Mr Chidambaram has given a little to low-income groups and taken some from the better-off, that is unquestionably the right course to adopt when the government's finances are under strain. Indeed, the finance minister has stuck to his prescription of "prudence, restraint and patience"; this minimalist approach has much to commend it. The stock market's negative response, driven by higher corporate taxes and perhaps by the size of the gross borrowing programme which has upset bond markets (and therefore hit bank stocks), is not a pointer to the quality of the Budget. Among other things, the gross borrowing figure has within it a buy-back programme for shorter-tenure debt; net market loans and short-term borrowings will in fact be two per cent lower than in the current year. So while the bond market too has responded negatively, this will hopefully be a temporary phenomenon.
The key deliverable in this Budget was evidence of fiscal discipline, captured in a single number that is the fiscal deficit. Mr Chidambaram has delivered for this year and promised to stay on course for next year. To the extent that the rating agencies have been watching this closely, it should help prevent a sovereign downgrade. As record trade deficits need to be financed by net capital inflows of about $100 billion, retaining international confidence has been Objective No. 1. Mr Chidambaram's secret to delivering on the deficit number has been a "take no prisoners" approach to expenditure control and indeed expenditure reduction. Total government spending has risen by only 9.7 per cent, in a year when nominal GDP growth (ie real plus inflation) will be 12 per cent or more. The ruthlessness of the cutbacks is most evident in the slashing of Plan expenditure, from the originally budgeted figure of Rs 5.21 lakh crore to Rs 4.29 lakh crore - a 17.8 per cent squeeze that must be without precedent. Defence spending too has been slashed from what was budgeted, by Rs 14,000 crore - the axe falling mostly on the capital budget (ie acquisition of new weaponry). The one item on which expenditure has not been controlled is subsidies, which have overshot the budget by a huge Rs 67,000 crore. In essence, Plan expenditure has been cut back, and defence preparedness sacrificed, to pay for higher subsidy payments on diesel, kerosene and cooking gas. This is no way to do budgeting, but given the floor on which he was supposed to dance, the finance minister had no choice. All those who criticise price hikes for oil products should recognise that failure to do price reform comes with a heavy price.
If there are questions on the fiscal numbers, they have to do with next year, because the secret to the projected lower fiscal deficit of 4.8 per cent of GDP in 2013-14 lies in some optimistic revenue assumptions. The 19.1 per cent growth postulated for tax revenue should be considered achievable, given that this year will see growth of 17.8 per cent, but it is worth noting that service tax revenue is expected to increase by 35.8 per cent - helped no doubt by the amnesty scheme. Of course, revenue could surprise on the upside - excise revenue this year has grown by more than 18 per cent, when manufacturing growth has been less than two per cent and inflation in manufactured goods has been low; indeed, excise growth for next year is budgeted at only 14.8 per cent! Nevertheless, question marks hover over non-tax revenue, since growth under this head is postulated at 32.8 per cent. One intention would seem to be that public sector companies will be asked to pay higher dividends, but there are also optimistic assumptions made with regard to revenue from disinvestment and spectrum sales. The finance minister will need some luck with these numbers.
While addressing the core fiscal task, the finance minister has done well to devote himself to specific economic objectives - raising the savings rate which has been dropping, and encouraging corporate investment at a time when the capital goods sector has been in the doldrums. The reintroduction of the investment allowance for a specific period, the offering of more incentives for housing loans, the attempts to plug loopholes, domestic and overseas, all these are to be welcomed. Above all, the Budget underlines the stability of the tax system - reflected in the slight reduction in media hype around the event. Once the goods and services tax and the direct taxes code come into effect - Bills on both have been promised for later this year - structural tax reform will be substantially complete. The issue that will remain is how to get greater tax buoyancy and thereby to raise the tax-to-GDP ratio back up to at least the level (11.9 per cent) that prevailed till the financial crisis of 2008-09, compared to next year's projected 10.9 per cent, up from 9.9 per cent last year; a committee is to be appointed to go into the issue. The bottom line is that Mr Chidambaram continues with his salvage operation.
