Fiscal deficit at record 6.8%, in borrow-and-spend Budget.
Dual GST from April 2010; Natural gas gets tax break, bonanza for RIL; Petrol, Diesel pricing review; New pension schemes to be tax-free; Direct tax code in next 45 days
Pranab Mukherjee has presented a borrow-and-spend Budget with a deficit that may be an all-time high, reflecting short-term pessimism about economic prospects. The finance minister reckons on only marginal improvement from last year’s GDP growth rate of 6.7 per cent, chiefly because he sees no upturn in international demand. Mukherjee has, therefore, focused his Budget on boosting domestic demand as a growth driver.
Compared to his Interim Budget of February, he has given more money for the Central Plan, more money to the states, more money for flagship programmes like the rural employee guarantee scheme, and more money for both urban and rural infrastructure. And since the current tax revenue assessments are lower than the February numbers, the deficit has ballooned — from 5.5 per cent of GDP in February to 6.8 per cent now. All Budgets since the economic reforms began in 1991 have seen lower deficits.
To finance this, he has resorted to even more market borrowing, which has quadrupled from the Rs 1,00,571 crore that P Chidambaram had postulated in his Budget for last year, to Rs 3,97,957 crore.
This is Mukherjee’s fourth Budget (the earlier three were in 1982-84), and he knows that he is testing the limits. He admitted candidly in an interview that this borrow-and-spend strategy was a response to exceptional circumstances and could not hold for the medium-term, let alone for the long-term. The Budget papers contain a promise that the deficit will be cut to 5.5 per cent next year, and 4 per cent the year after. Presumably, GDP growth will have recovered by then to the 9 per cent that the finance minister hoped to achieve “at the earliest”, as he said in his Budget speech.
In other words, this is a Budget for what is seen as an especially difficult year; so the fiscal stimulus must continue, and fiscal discipline can wait. Mukherjee recognises also that the borrowing programme runs the danger of affecting interest rates and crowding out private investment; he will take up the issue with the Reserve Bank at a meeting on Saturday, and look for ways of “innovatively managing” the government’s massive borrowing programme.
However, the bond market in Mumbai reacted to the deficit announcement with yields climbing for longer-term maturities. As a flip-side response, bank stocks led the fall in the stock market as a lot of banks have been holding long-term maturity government paper. Bankers said the short-term liquidity situation remained comfortable; one bank CEO even said he was thinking of dropping his bank’s prime lending rate.
The difficult fiscal situation has not prevented the finance minister from tossing out goodies for tax payers: the income-tax floor has been raised a bit, and the tax surcharge on those earning Rs 10 lakh and more has been abolished. For good measure, he has abolished the fringe benefit tax (FBT), though some of what the FBT covered (including employee stock option programmes) will now be taxed as perquisites.
The biggest beneficiaries from the package are those in the upper income reaches. The revenue loss of about Rs 18,000 crore is sought to be recouped through a higher minimum alternate tax, which goes up from 10 per cent to 15 per cent. The changes in direct taxes, taken together, were revenue-neutral, Mukherjee said.
There are specific tax changes for selected industries, but the broad structure of indirect taxes has remained unchanged. A disappointed stock market lost about 6 per cent of its value during the day, in part because of the level of the deficit and also because no target was set for revenue from disinvestment, seen as a bellwether reform issue. In contrast, most businessmen seemed to recognise that the finance minister had done a fine balancing act, in the face of a difficult situation.
The biggest reform measure in the Budget is the commitment to the schedule for introducing an integrated Goods and Services Tax (GST) next April. This involves prior action in the form of Constitutional amendments and other legislative changes, apart from a re-alignment of tax rates. Mukherjee said his confidence on sticking to the GST schedule flowed from the work done by the committee of state finance ministers, whose work he praised. He said in the interview that he expected better tax compliance in the wake of the GST to make possible a significant lowering of the nominal tax rates.
Two other reform measures involve fertiliser and petroleum products. In the former, the present product-subsidy model will give way to a nutrient-based model, yielding eventually to direct subsidy payments to farmers rather than manufacturers. Mukherjee hoped this would create room for innovative fertiliser products and fresh investment in the fertiliser industry, which has seen no investment for more than a decade.
On petrol and diesel, the finance minister said an expert group would advise the government on how to make the pricing policy for these products “viable and sustainable”.
Mukherjee’s tax proposals for the current year include specific benefits for the tech sector, oil and natural gas (exploration, production and pipeline-transportation), textiles and a handful of others (like mobile phones and set-top boxes). The Commodities Transaction Tax, introduced last year but never given effect to, has been scrapped. And in a third reversal of the positions adopted by his immediate predecessor, Mukherjee has extended the service tax to cover law firms, arguing that he disagreed with P Chidambaram’s view (stated in jest) that they did not provide a service! The new pensions scheme will enjoy various tax benefits.
The finance minister said that this is the first Budget to cross the Rs 10,00,000 crore figure, and recalled that Independent India’s first Budget was for Rs 193 crore.
