Budget 2010: Pragmatic but inflationary

Akrita Reyar Pranab Mukherjee is always known to be a sensible man; and if one were to extend the character reading to his budget, one would immediately see it as overall pragmatic; measured but with a steady pace. Mukherjee has lived up to most of the promises he made in 2009, which is a hugely welcome step, considering that in the past most Finance Ministers have made big promises of fiscal prudence but never kept their word. Fiscal Prudence Pranab, as per his assurance last year, has contained fiscal deficit at 6.7-6.9% vis the projected figure of 6.8%. Moreover, he has set a target of 5.5% this financial and drawn a road map that takes the figure to 4.1% by 2013. The budget seeks to reduce market borrowing to Rs 3.45 lakh crore, well under the Rs 5 lakh crore mark, exceeding which would have set off alarm bells. The divestment target of Rs 40,000 crore is meant to step in to ease efforts towards fiscal consolidation. The Finance Minister also aims to bring down the combined Centre-States debt to 68% of GDP. This is a move in the right direction, as India is among the countries with the highest borrowing-GDP ratios in the world and currently shares the figure of 81% ratio with US, another high debt country. Pranab Mukherjee has clarified that it was concerns over inflations and prudence that had made him resist the temptation of issuing oil and fertilizer bonds, as he wanted to keep the market borrowings under check. But despite fiscal prudence and attempts to limit government borrowings, inflation, and particularly food prices, remain a major worry. Challenges and Road Map At the onset of his speech, the Finance Minister had spelt out the economic scenario as well as the challenges the Indian economy is facing. On the economic scene, he said that Indian economy has proved resilient and successfully emerged from the global downturn of 2008-09. Though its growth rate had been hit and was down at 6.7% vis-à-vis 9% in the previous three fiscals, the economy had emerged largely unscathed. On the other hand, Wholesale Price Index had shot up sharply and the economy has entered a high inflation phase. Bad monsoons, and supply side constraints on food grains front have led to increase in prices of basic edibles. So, according to Pranab, three challenges need to be faced. First, the Indian economy needs to revert to the previous 9% levels and then go on to breach the double digit mark. But that is not going to happen unless the agriculture sector recovers from the negative zone it has slipped into and register at least a 4% growth rate. Second, the economic growth needs to be made inclusive with emphasis on infrastructure particularly in rural areas, education and health. And lastly, the public delivery mechanism needs to be made more efficient. The Finance Minister has sought to address these problems by stimulating growth through a twin policy of higher spending and fiscal concessions; fiscal consolidation and increased public spending. The idea is to release sufficient money in the market to boost domestic consumption, but work towards fiscal prudence, as medium and long terms goals can’t be achieved without strong fundamentals being in place. Taxation, Inflation & Industry Widening of the tax slabs will help individuals especially the salaried class to save anywhere between Rs 20,000-50000 p.a.. This will help increase spending as well as cushion inflation that will inevitably be triggered by hike in fuel prices. Meanwhile, the Rs 1.73 lakh crore infrastructure investment through schemes helping the rural sector would increase consumption and saving in the countryside. Moreover, social spending is also focused more on creating capital assets rather than just consumption, which will give returns in the future No change in corporate tax is a welcome step, as is the unchanged service tax. Taking a different route to mop up more money, new services have been brought under in the tax net. The increase Minimum Alternate Tax from 15 to 18% may prove to be a dampener and hit some infrastructure companies and IT industry in particular, which is already disappointed at no extension of the tax holiday. The auto sector suffers a double whammy. Besides, the excise rate been increased by 2% to 22%, which was on expected lines, there has also been a Re 1/litre petro tax and re-instatement of 5% excise on crude and 7.5% on diesel and petrol. While the Prime Minister justified the move saying the concessions had been extended as global crude had escalated to USD 112/barrel, and now have come down, the Oil Secretary feels it would be tough for oil companies, which are already under pressure, to absorb the tax. The increase can meanwhile be seen as indicative of a need for long overdue price correction. A word that one cannot help but add is about the unprecedented Opposition walk out over the fuel price increase. Not only has such a thing never happened in the past, it is worth noting that the NDA government had hiked petro prices at least 9 times during its regime. And there was absolutely nothing else so provocative in the Budget that merited such an extreme step. Yes, the concerns about prices running amok are real. Fuel prices have a cascading effect and the inflationary trends spill over to other goods and services by the very fact that all goods need transportation to reach the market. The common man will be specifically wary of its impact on food prices that have touched new highs in the past few months. While Pranab Mukherejee made some noises about fresh thrust on retail outlets to bridge the gap between wholesale and final prices, it seems he would need to address the issue in more concrete terms if he wants to rein in prices. Staying with indirect taxes, while announcing the 2% excise increase, the Finance Minister said he was acting as per the recommendation of the 13th Finance Commission. The increase thus should be seen as a part of a calibrated roll back of stimulus. The cautious approach adopted extended to the Direct Tax Code and Goods and Services Tax, with the FM choosing to wait for another year before implementing these. Mukherjee said he was optimistic that he would be able to plug all loopholes and address apprehensions on direct taxes during the period, and the announcement should be seen as a part of the roadmap for the future tax regime. Banking is among the major beneficiaries with not just a capital injection of Rs 16500 crore for public sector banks, but a policy to increase licences for private sector banks and NBFCs. Moreover, the extension of the 1% interest subvention on home loans up to Rs 20 lakh will help the realty market. The stock market gave a thumbs up to the FM with an immediate rally. This could either have something to do with low expectations or the cautiously positive accent of the growth oriented budget. The positive is that the Indian economy continues to depend more of domestic consumption and investment compared to foreign inflows and this would continue to provide it some insulation from international shocks. With domestic savings at a 30% level, the trend is likely to continue. The structural changes that the FM has quietly unleashed will give the domestic sector a further leg up. All in all, much like his balanced personality, while drafting the budge, he’s kept it real.