Why people are cool to the Budget

Finance Minister Palaniappan Chidambaram's eighth Budget did not disappoint those who wanted the government to send out a strong and unequivocal message on fiscal consolidation. He achieved that primary goal by cutting expenditure in the current year and proposing a lower fiscal deficit of 4.8 per cent of gross domestic product (GDP) in 2013-14, compared to 5.2 per cent in 2012-13.

You may quarrel with the numbers that he has presented by arguing that many of them are not easily achievable, or express your disappointment over the absence of concrete measures in the Budget to address the Indian economy's other key concern - the widening current account deficit. But you have to admit that this Budget, of all the Budgets presented a year before a general election in recent times, is the least damaging for the economy. Were you to think of the 2008-09 Budget and the farm debt waiver scheme announced at that time, then you would know the difference.
 

Yet the markets' lukewarm response and the generally cool reception the Budget has received should make you wonder why everybody, like Oliver Twist, seems to be unsatisfied and asking for more. Here is an attempt to understand why Mr Chidambaram's Budget, in spite of being largely responsible, failed to impress many sections of people.

Expectations management is a key instrument in ensuring effective governance. This is equally true of the Budget-making exercise. The fact is that within just a few months of his taking charge as finance minister in August 2012, Mr Chidambaram raised expectations from his Budget, perhaps, to an unsustainably high level. There is no doubt that what he did soon after taking charge of North Block was badly needed.

He raised the general awareness about the alarming consequences of the worsening fiscal situation, made worse by slowing economic growth and lack of reforms in several areas. With the help of a report on the problems of the Indian economy, prepared by a committee headed by Vijay L Kelkar, the finance minister impressed on the Congress leadership the need to take quick measures to revive growth so that the government finances improved and its various social sector programmes could remain adequately funded.

Remarkably, the message hit home; the United Progressive Alliance (UPA) government recovered from its policy stupor and initiated a series of steps on petroleum product prices, foreign direct investment norms and railway passenger fares. This naturally lifted the mood in the markets and the corporate sector, raising hopes that the government had finally realised the importance of getting the economy in shape and fixing the leaks in the government's expenditure bucket. What's more, even the Congress president - the prime mover behind a host of entitlement schemes introduced by the UPA in the last few years - began talking about the importance of fiscal rectitude. That was precisely when expectations about the Budget soared and living up to them became a formidable challenge.

Having achieved what he did in the first seven months (sensitising his colleagues in the government and the party to the need for austerity and investment-friendly policies), his Budget for 2013-14 was naturally judged by whether he succeeded in keeping a tight leash on government expenditure by cracking down on leaky social-sector programmes that guzzled funds without commensurate gains for the beneficiaries, or by introducing new pricing mechanisms to slash subsidies. His Budget did cut the fiscal deficit, but created the impression that he could have done more on both fronts - expenditure containment and revenue augmentation. That was one reason why last week's Budget failed to enthuse the markets or the corporate sector.

There are two more possible reasons for the muted response. First, the Budget seemed to be a half-hearted attempt at reforming the taxation system. He would have achieved much more - not only in terms of revenues but also by way of cleaning up the tax system - if he had succeeded in weeding out a large number of unnecessary exemptions in both the direct and indirect taxes. The surcharge on income tax on those earning above Rs 1 crore a year gave him additional revenue of about Rs 4,400 crore, but a crackdown on the exemptions that continue to thrive in our taxes would have given him much more, and also earned him plaudits for being a tax reformer.

It is neither reasonable nor correct to argue that the revenue department did not have time to clean up the system. If the Budget cannot do this in seven months under the new minister, no Budget can ever achieve the most critical task of ridding the tax system of needless and complicating exemptions that bring down the overall effective rate of taxation. The disappointment is that, on the contrary, the Budget for 2013-14 has in many ways introduced new exemptions such as expanding the negative list under the services tax.

Second, the Budget failed to focus on the few big reform ideas and highlight them as the finance minister's goals to be achieved during the next year. Could he have outlined in greater detail how he hoped to proceed on the roll-out of the goods and services tax or the direct taxes code? And could he have given some indication of how he hoped to curtail the subsidies for fertilisers, at least, if not food? Or was the Budget's long-term vision circumscribed by the prospects of elections next year and his limited effectiveness in bringing about such changes in that short period? Taken together, the absence of effective management of expectations, the failure to speed up tax reforms and the absence of big ideas appear to have taken a toll on what could well be Mr Chidambaram's last Budget.