Budget 2012: Deficit is pure hogwash

What kind of a leader am I, if I cannot have my way?
— Meryl Streep as the iconic Margaret Thatcher in The Iron Lady

Understandably, no one expected Pranab Mukherjee to have his way and do a Thatcher on his coalition partners, what with elections due in Gujarat, Himachal Pradesh and Karnataka in under a year.

Equally, he displayed bravado in more ways than one — this time, he quoted from Hamlet and not his old favourite, Rabindranath Tagore.

However, the bravado was clearly a case of misplaced desperation and hence the very retrograde step attempting to roll back the Vodafone tax ruling.

The lure of Rs40,000 crores, which the retrospective rollback brings with it, is certainly raahat for a lame-duck, cash-strapped government that sees no chaahat from its strident allies. However, more importantly, the rollback questions the sanctity of the highest judicial office of the land and brings out in the open the deeply fractious relationship between the executive and the judiciary. Clearly, Mukherjee has bitten more than he can chew.

Some market men have hailed the Budget as realistic and credible. I fail to fathom what is so realistic in a budget that pretends to lay out the backbone of Goods and Services Tax (GST) by August 2012. Mukherjee is obviously aware that for GST  to be implemented, a constitutional amendment is needed, which gives the Centre sweeping powers to tax goods right up to the retail stage, as is globally prevalent. That’s unlikely anytime soon if Mamatadi has her way.

Again, what is so credible in a Budget that provides for just about Rs44,000 crores for oil subsidies next year, when diesel subsidies alone are Rs80,000 crores today? Does the government have a crystal ball that says Brent crude will fall, or does Mukherjee know a diesel price hike is ahead?

I am certainly not betting on a diesel hike and if you don’t believe me, just refresh your memory on how Coal India had to eat humble crow on the gross calorific value-based pricing issue, simply because the powerful ‘power sector lobby’, wouldn’t have any of it!

Again, what is the logic in providing for a mere Rs 72,000 crore as subsidy on food for the next financial year, when the cost of providing rice and wheat at Rs2/kg to India’s 800 million poor under the Food Security Act is a staggering Rs 250,000 crores?

Clearly, the math does not add up and a 5.1% fiscal deficit projection for fiscal 2013 is pure hogwash.

True, India is a welfare state, but what is inexplicable is the lethal pragmatism with which Mukherjee has raised excise and service tax rates to 12% from 10%. The hike in will at best mobilise a combined Rs 35,000 crore. It will, however, trash the Reserve Bank of India’s stated objective of reining in inflation, which will now get a boost, thanks to the infamous ‘multiplier effect’, on the back of higher taxes.

Had Mukherjee been a tad more imaginative and a little less pragmatic, he could have explored the re-introduction of inheritance tax, death duty and a marginal long term capital gains tax, while reducing the short-term one from 15% to 10%.
Equally, a reduction in the securities transaction tax (STT) on at least one leg (either buy or sell) of derivatives transactions would have been of material impact. Reduction of STT on cash delivery transactions is inconsequential given that on any given day, it is the derivatives segment which accounts for more than 60% of the overall stock market volumes. Also, I wonder what stopped Mukherjee from removing the dual levy of STT on Indian mutual funds — paid once when a person buys the units and then again when the said fund invests in shares!

Coming to the banking sector, clearly, the number-crunching has gone awry. If State Bank of India’s Tier-1 capital alone has to go to say a healthy 9% in fiscal 2013, from the sub 8% currently, it will need anywhere between Rs 14,000-16000 crore by way of capital infusion. That being the case, the budgetary provision of just about Rs 16,000 crores for recapitalisation of all public sector banks and rural banks put together is a mere pittance.

I am equally flummoxed by all this hype about the Budget being pro-infra. Far from it. It remains to be seen if the talk about removing the cascading effect of the dividend distribution tax is anything more than a paper tiger. Ideally, Mukherjee should have reduced the minimum alternate tax (MAT) rate from 18.5% to 15%, to boost infra projects that are implemented through the public private partnership (PPP) route and rely heavily on MAT. Power sector reforms are meaningless without implementation of the Shunglu committee recommendations, of which there was not even a mention in the FM’s speech.

Ditto goes for what can at best be described as ‘lip service’ to reforms on the personal taxation front. Only 35 million people out of a total of 1.2 billion pay taxes in India. Less than 5% of the income tax payees account for more than 70% of the income tax collections in India. That is how regressive our tax system is. Surely Mukherjee could have done better than raising the basic exemption limit from Rs 180,000 to just Rs 200,000. What stopped him from bringing back “standard deduction” benefits for salaried employees and raising tax concession limit on medical expenses from Rs 15,000 per annum to atleast Rs 30,000 per annum, in the wake of rising healthcare costs, is something which we may never find out.

Let me end with this brilliant one liner by Brad Pitt, in one of the most impressionable scenes from The Moneyball, one of the great Oscar movies this year: “You were paid seven million dollars for the player that you were but I am paying you just $3 million for the player that you now are!”

Pitt essays the role of a miserly general manager of an underdog baseball team that is trying hard to put up a winning team. Go and watch it, finance minister. It’s a class act in budgeting and yet makes the cut.

Sanju Verma is a market expert and the MD & CEO of Violet Arch Securities, formerly called Alchemy Shares & Stockbrokers