The Union Budget 2010-11 was presented under favourable growth circumstances, notwithstanding the low growth figures just issued for the third quarter. The nominal GDP growth in 2009-10 is likely to be much higher when the provisional estimates are issued because a real growth of 7.2 per cent with inflation at present rates is just not consistent with nominal growth of only 10.6 per cent. The final deficit percentages for 2009-10 will, therefore, be a touch lower and those projected for next year will be lower, too.
That by itself is not great cause for comfort. The revenue deficit for next year at 4 per cent is well above the 3 per cent promise in the medium-term fiscal plan (MTFP) presented with last year’s Budget. The fiscal deficit for FY 2011, however, is in keeping with last year’s MTFP. This fiscal correction is to be achieved by a substantial measure of expenditure control, of non-plan revenue expenditure in particular. The nettle of subsidy control is beginning to be grasped. The fertiliser subsidy will be reconfigured to a nutrient basis, with advantages that are more than just fiscal.
The petroleum subsidy has been deferred for further consideration, but in the interim there is a hike in the customs duties on crude and refined petroleum. The announcement of this hike precipitated an uproar so loud that a good bit of the subsequent speech of the Finance Minister became inaudible. The proposal to have competitive bidding for allocating coal blocks for captive mining is an example of the kind of institutional reforms recommended by the 13th Finance Commission as a supplement to what has hitherto been a purely target based approach to fiscal correction. Thus, the objective of fiscal discipline has been recognised directionally, if not in terms of the distance travelled towards it.
There was coherence in other respects as well with the objectives as spelled out in the terms of reference of the 13th Finance Commission. Growth is given a push with the attention to infrastructure, the Delhi-Mumbai dedicated corridor, and mega power plants. The infrastructure package includes the additional tax deduction up to Rs 20,000 for taxpayers investing in infrastructure bonds. There is continued support for the Pradhan Mantri Gram Sadak Yojana whose extension of last-mile connectivity has been the single most productive factor behind the spatial dispersal of growth to the rural areas. The four-pronged approach to agriculture recognises the critical need for an integrated approach for raising productivity, especially in rain-fed pulses and oilseed cultivation for curbing the runaway inflation in these commodities.
The environment issue is frontally addressed with recognition of the ‘polluter pays’ principle and with the establishment of the Clean Energy Fund. Convergence has been achieved between the newly enhanced excise on goods at 10 per cent and retention of the reduced tax on services at 10 per cent. All of this augurs well for the future integration of goods and services in indirect taxation and moves the fiscal system towards greater coherence.
There were disappointments and a few negatives as well. The continued support for Special Ecoomic Zones needs justification in view of the tax expenditure involved and the impact of lower tax buoyancies at the Centre on states and, after the acceptance of the Finance Commission recommendations, on local bodies as well.
The Clean Energy Fund is to be funded through an enhanced levy on coal. This mode of financing is entirely sound environmentally but poses an additional burden on coal-based thermal generation, which accounts for 60 per cent of total electricity generated. The poor financial health of the power sector is one of the major unsolved fiscal problems of states today. Here again is an example of a measure whose impact on states has not been sufficiently thought through.
Indira Rajaraman, Honorary professor, Indian Statistical Institute, New Delhi. Member, 13th Finance Commission
