The finance minister needed to do three things in the Budget: control the deficit, bring down inflation, and create the conditions for faster economic growth. He can be said to have succeeded substantially, but not wholly. The unfinished task is that the deficit has been left too high, as also market borrowings which go up next year. That does not give the Reserve Bank of India (RBI) the elbow room to drop interest rates sharply, a necessary condition for the revival of private investment and of finance-backed consumption. Additionally, note that the Budget provides 36 per cent less (about Rs 25,000 crore) for the petroleum subsidy at a time when world oil prices have been climbing. This makes it clear that Mr Mukherjee intends to increase petroleum product prices, perhaps when Parliament is in recess — a decision that is bound to provoke fresh outbursts from the Trinamool Congress.
Less predictably, this situation carries with it latent inflationary pressure. The increase in excise and service tax rates will create a cost-push effect, and if it is followed up with hikes in the prices of petroleum products, inflation will get a fresh kicker. It is not that these steps should not be taken; rather, that if inflation stays high on these accounts, the RBI will remain disinclined to do much about lowering interest rates. In short, the downstream danger with a job half-done is that the projected economic growth rate for next year (7.6 per cent) will not materialise. Should that come to pass, the country could see a diluted repetition of what happened in the current year: the tax revenue assumptions, though inherently more realistic than last year, prove to be optimistic, and therefore undo the Budget’s arithmetic. That is the principal danger with the seasoned Mr Mukerjee’s seventh Budget. One must hope that seven proves a lucky number for him and for the country.
To his credit, the finance minister has taken tough decisions. He has raised the excise duty by rolling back the booster given to industry in 2008-09, in the wake of the Lehman crisis. He has also widened the service tax net and then equalised the rate with excise, at 12 per cent, thus preparing the way for moving to a goods and services tax. Indirect tax rates are likely to settle here, as direct taxes have done already; future Budgets are unlikely to see major tax changes. In raising fresh taxes of about 0.4 per cent of GDP, Mr Mukherjee has followed the path trod a few days earlier by the courageous railway minister.
The message from the government’s two Budgets is clear: it has taken the hard decisions and is prepared to take more. This is welcome after the pussy-footing of the last year and more, for it is primarily the inaction on petroleum prices that destroyed the arithmetic of this year’s Budget (the total subsidy bill has ballooned by Rs 73,000 crore, or about 0.8 per cent of GDP; lower tax collection has accounted for most of the balance slippage).
The chief criticism of the Budget would be that it has no over-arching growth strategy. It has tried to make up for this with specific measures to encourage investment in the infrastructure sectors, like permitting access to international funds. It has extended viability gap funding to new sectors, and offered incentives like additional depreciation and interest rate subventions. In style and substance, these hark back to the 1980s, when Mr Mukherjee first cut his teeth in the finance ministry. How effective such steps can be in the absence of a more supportive macroeconomic environment is the question. In the four post-Lehman years, growth has averaged about 7.6 per cent — which is what is projected for next year as well. This may prove to be the new benchmark until it is demonstrated that growth of eight per cent and more is feasible once more. This need not lead to a great deal of breast-beating; most of the world has slowed down in comparable fashion. But the operative point would be that the country has simply not done what is needed for maintaining eight per cent growth and more.
On the expenditure side, a notable feature of the Budget is the sharp step-up in capital expenditure by Rs 48,000 crore, or more than 30 per cent. However, closer examination reveals that a good deal of this is on account of defence (Rs 13,000 crore), various internal and coastal security agencies, and contributions to international institutions like the International Monetary Fund, for maintaining India’s voting power (Rs 15,000 crore). Most of this will not do anything to boost domestic demand. Revenue expenditure has gone up by a more modest 11 per cent, implying that expenditure control is still being attempted even though such efforts failed last year.
In many ways, the most encouraging feature of the Budget speech is the broad direction it has charted for government subsidies, all of them focused on getting better bang for buck by reducing leakage and wastage, and through better targeting. Mr Mukherjee has used Nandan Nilekani very effectively to work out the modalities and create the institutional structures for achieving improved efficiency, and for adopting a cash transfer system. It is a pity, though, that Mr Mukherjee has put a subsidy cap of two per cent of GDP; from the perspective of addressing poverty issues and troubled sectors, the limit need be no more than 1.5 per cent — and this should be legislated so that it cannot easily be tossed aside.
