Zooming in on the average voter in an election year

The politics of the day demanded a budget focused on the Aam Aadmi. Under the circumstances, finance minister P Chidambaram delivered an ordinary budget marked by a mid-term course correction of economic policy emphasis under political compulsions.

The attention now shifts to agriculture, education, health and rural infrastructure. There are some fire-fighting measures in terms of duty cuts to douse the soaring flames of inflation. There are also a few crumbs of relief for small taxpayers, small service providers and small enterprises.

Delayed reforms

Personal income-tax, corporate tax and service tax rates remain unchanged. A moderation of tax rates has been put off until the proposed Income-Tax Code is ready, hopefully by the next budget. Even then, the finance minister mops up Rs 3,000 crore net through his direct tax proposals.

The budget imposes an additional 1% cess on all central taxes — that's a levy on all taxpayers and on all goods and services — to raise Rs 5,000 crore meant to further the government's agenda of providing 27% reservation to other backward castes in education. This is over the existing 2% education cess.

Also, the dividend distribution tax on companies has been hiked from 12.5% to 15% and the coverage of minimum alternate tax (MAT) has been extended to infotech companies.

Key policy reforms are on hold, as is evident from the finance minister's complete silence on the financial sector, pensions, insurance, foreign direct investment (FDI), retail, special economic zones (SEZs), labour laws and administrative reforms. There is not even a roadmap for the introduction of the national-level common goods and services tax (GST) that is supposed to usher in a "common market" by 2010.

Growth dividend

"Faster economic growth has given us, once again, the opportunity to unfurl the sails and catch the wind", Chidambaram said. The 9.2% growth this year, as Chidambaram admitted, has filled the government's coffers, enabling it to commit substantially higher resources to the UPA government's flagship programmes in the villages and the social sector. The finance minister has, however, taken no insurance against an economic slowdown next year.  

The budget does not hurt growth as such, but, at the same time, it is taking a huge gamble that the momentum will continue even without any more proactive steps for promoting growth.  

Other than paying lip-service to the growth drivers of savings and investment, Chidambaram did precisely nothing to ensure that the investment boom is sustained.

Similarly, there was complacency with regard to the small progress made on the infrastructure and energy fronts. There were no bold initiatives to meet India's huge infrastructure funding needs.

Chidambaram spoke a language very different from his last three budgets, devoting 15-20 minutes to talk just about agriculture. The thrust of this budget is clearly on raising farm productivity and growth, reaching out to 650 million people dependent on agriculture for a living. This focus also subserves, in the medium-term, the other major goal in this budget - to fight the politically expensive problem of inflation.

Thanks partly to high inflation and partly to high GDP growth, the finance minister could claim credit for his budget being smart in marksmanship. The finance minister, in fact, missed this year's deficit targets in absolute terms, but could show that he had bettered the fiscal consolidation targets under the Fiscal Responsibility and Budget Management (FRBM) Act.

The magic is that these targets are expressed as a percentage of GDP. The nominal GDP expanded not only because of an unexpected 9.2% economic growth, but also because inflation has been ruling well over 6% for 42 of the 52 previous weeks.
Lady luck has smiled on the FM, and he has chosen to ride it again blindly.