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ShareMumbai: Three words sum up Pranab Mukherjee's short, and not so sweet, budget speech: yesterday, today and tomorrow. The approach was so yesterday, the proposals all about meeting the needs of today, and the best ideas were left for tomorrow. No great flashes of brilliance punctuated Mukherjee's speech. Caution and incrementalism were the watchwords.
The 2009-10 budget focuses on dealing with the here and now, with today's pressing problems being given pride of place. The idea is to make sure that the small recovery in the economy after last year's meltdown does not peter out. The sops of last year for exporters and domestic industry continue. He has also scattered a few crumbs of hope for taxpayers and businesses, by raising the tax exemption limits a wee bit for salaried individuals (Rs10,000 for individuals, Rs15,000 for senior citizens), and abolishing the fringe benefits tax (FBT) -- something businessmen have been baying for.
The best things -- reforms and new ideas -- he kept for tomorrow. A return to fiscal rectitude has been put off with the promise that he will "come back" to it "at the earliest". Meanwhile, the fiscal deficit -- the gap between government expenditure and revenues which has to be bridged by borrowings -- has shot up even further from 6.2% of gross domestic product (GDP) in 2008-09 (the year of the meltdown), to 6.8% this year (when growth is reviving).
With global oil prices rising, petroleum subsidies cannot continue indefinitely. But the question of how to price petrol and diesel has been dispatched to a committee. Mukherjee has promised to pay fertiliser subsidies directly to the farmer instead of routing it through fertiliser companies, but the actual shift will happen only "in due course", not now.
Is this too pessimistic a reading of Mukherjee's budget? Were businesses and stock markets, which have crashed, expecting too much, too soon? Perhaps. For Mukherjee is known to be a cautious man. He is not the type to make, bold (or brash) moves, a la P Chidambaram. If a Chidambaram could invent five new taxes (FBT, dividend distribution tax, securities transaction tax, commodities transaction tax, and bank cash transaction tax, among other things), or announce amnesty schemes for tax evaders, Mukherjee is less prone to such sweeping changes in tax regimes.
On disinvestment, Mukherjee managed to do better by promising to list many unlisted public sector companies, but not without making a promise that no company would leave the public sector. Thus, both the reform-mongers and the no-changers have reason to hold their fire.
The crux of the problem with Mukherjee's budget is that it has no big idea or initiative. The closest he came to one was when he announced the possibility of the introduction of a goods and service tax (GST) to replace state value-added-tax and central excise and service taxes on April 1, 2010. We will thus have two GSTs, one levied by the state and another by the centre, if all goes well, on all goods and services barring a few exempt categories.
On infrastructure, which really cries for a bold initiative, he has chosen to merely tinker with funds flow. The Indian Infrastructure Finance Company will get more leeway to borrow and lend funds, but the real problems relate to state-level hold-ups in land acquisition, environmental clearances, etc. All Mukherjee had to say on this was: "I have urged my colleagues in the central and state governments to remove policy, regulatory and institutional bottlenecks for speedy implementation of infrastructure projects." If only wishes were horses...
Even where he has chosen to give with one hand, he has taken away with the other. The exit of FBT is accompanied by an increase in minimum alternate tax (MAT) from 10% to 15%. MAT is paid by zero-tax companies which benefit from other provisions of the tax law. The excise concessions given as part of the stimulus have been partially annulled by raising the duty on non-food, non-medicine items from 4% to 8%.
He has also more or less killed his government's New Pension Scheme, announced last May. By decreeing that the NPS will be taxed on maturity when a person attains 60 years of age, he has made other comparable schemes better. These include: the public provident fund, the employees' provident fund, and the equity-linked and insurance schemes. These schemes are not taxed when they mature or are redeemed.
The big thing in Mukherjee's budget is something that ought not to be big: government expenditure. He proudly pointed out that government expenditure will top Rs10 lakh crore this year; he should have been more worried by the fact that less than two-thirds of it is being financed by taxes and other revenues. The rest is sheer borrowing.
A good part of the increased expenditure is for providing social security nets through schemes like the National Rural Employment Guarantee Scheme (NREGS), which gets a whopping 144% increase in outlays.
But when you spend big by borrowing heavily, there are two side-effects: High government borrowing pushes others off the map, pressuring interest rates upwards. This is not good news for economic recovery, or retail borrowers who want to buy cars or homes. The other consequence is inflation. Right now, the wholesale prices index is in negative territory, but if the economic revival continues, inflation will start climbing quickly. This means interest rates will bottom out sooner than later. Defeating the slowdown will then have been only a pyrrhic victory.
Pranab-da could surely have done better. Only bolder reforms and disinvestment could have helped him avoid this trap. He has missed the bus.
