Originally Published 2012-03-17 00:00:00 Published on Mar 17, 2012
The Finance Minister has chosen to walk the conservative path, hoping to stimulate investment and growth through small half-measures. Expect high rates of inflation in FY 13 and greater pressure on the fiscal deficit despite white paper on black money.
Budget wishy washy, lacks direction
Union Budget 2012 has not been spectacular or sensational even though India is facing many serious problems on the economic front. The main expectation from the Budget was that it would boost investors’ confidence and assure that the Indian growth story is still intact. But coming as it does on the heels of the electoral debacles suffered by the Congress in the recent elections, the Budget was not likely to be a ’Big Bang’ affair but only a balancing exercise so that no feathers would be ruffled.
Finance Minister Pranab Mukherjee has accomplished this feat and has taken a quiet, conservative path of raising revenue and cutting expenditure especially because the fiscal deficit situation has gone out of hand this year and stands at 5.9 per cent instead of the targeted 4.6 per cent of the GDP. He also announced that GDP growth will be at 6.9 per cent.

The Finance Minister has raised some taxes because fiscal consolidation is a number one priority. Though he knows that Indian industry has been struggling, and private investment has been falling, there was no corporate tax cut. Instead of reducing interest rates, the External Commercial Borrowing (ECB) route has been opened up further and aviation companies can now borrow up to $1 billion. The government has been easy about ECB because the government debt to GDP ratio is only at 45.5 per cent. The industry was expecting some more bold initiatives like a hike in the depreciation rate to encourage investment but that has not happened.

In agriculture, which is a weak sector whose growth registered only 2.5 per cent last year, he has given many sops with which he hopes to improve the credit situation of small farmers and give them better access to farm inputs and storage. For his interest in enhancing various schemes for promoting agricultural productivity and storage he deserves credit.

What is naturally expected from a sector which now contributes 59 per cent of the GDP is an increase in revenue generation. Thus much to the chagrin of ordinary middle class consumers, the service tax has been raised from 10 to 12 per cent and the service tax net has been widened to include most sectors. The negative list would include pre-school and high school education and entertainment services. But in general, many recreations like eating out, air travel and leisure activities are set to cost more.

The multiplicity of SUVs in metro cities is a recent phenomenon and quite honestly needs to be curbed both because they are too big for the roads in India and environmentally unfriendly. Excise duty on large cars has been raised from 22 per cent to 24 per cent. Gold too is something which people have been hoarding in India since ancient times. India’s gold imports are biggest in the world and since the appetite for gold is unlikely to be reduced, the custom duty on gold has been doubled to bring in more revenue to the government’s coffers unless people’s demand for gold is lessened due to higher prices. Massive gold imports put pressure on current account deficit which was at 3.6 per cent of the GDP which in turn put pressure on the rupee.

In the banking sector the Budget has provided Rs 15,888 crore for recapitalisation of public sector banks, regional rural banks and the government is going to create a financial holding company to meet the financial needs of PSBs. There will also be tax exemption on individual share investment below Rs 10 lakh. One is not clear about the "white paper on black money" and what it contains but, at least, official pursuit of the cause is laudable.

The Direct Tax subsidy move has been initiated in the case of fertilisers, kerosene and LPG. The FM admitted that food and fertiliser subsidy was the largest item of expenditure which must be reduced. Subsidies have to be brought down to 2 per cent of GDP in FY13. This is in keeping with the ongoing economic reforms in which subsidy reduction is a top priority and the FM blamed the rise in subsidies as the main reason for rising fiscal deficit this year. But the government has decided to fully provide for food subsidy in the Budget. It aims at bringing down subsidy to 1.7 per cent in the next 3 years.

Like in China, there has to be a sustained rise in domestic demand. Growth has to be driven by domestic demand because external demand from the western countries has been faltering. Diversifying exports away from the US and the EU has been achieved to a great extent and is advisable in the future because the Eurozone crisis is going to last for some time and will affect the entire world.

There was much incentive for skill development in Budget 2012 though this seems a monumental problem today. Not enough is being done to provide vocational training to 50 million job seekers every year.

Health and education have got their share of increase in budgetary allocation but no move towards universal healthcare in India has been announced. Malnourishment has been talked about and import of some protein-rich food has become less costly. But the fact remains that much more are needed to eradicate malnutrition among the under-5 age group and to reduce maternal mortality. Healthcare allocation remains much below par in India as compared to the BRICS. Lack of primary healthcare is the main reason for malnutrition and disproportionate number of maternal deaths.

Tax payers were given a moderate relief with income tax exemption limit being raised to Rs 2 lakh. Other income tax rates on bigger slabs have been increased marginally. Much would depend on the headline inflation situation which has been subdued in January 2012 but increased marginally in February to 6.9 per cent. With higher crude oil prices in the future, and consequent fuel price hike, inflation is likely to pick up though the FM has predicted a lower inflation this year.

Private demand would remain subdued if inflation picks up and if it does, the Reserve Bank of India could be constrained to reduce interest rates which will mean continued decline in investment in the future. The next month’s data on industrial growth would be an important indicator on whether the industrial revival has started or not.

Otherwise the GDP growth rate will not be 6.9 per cent. With lower growth rate, there may be lower revenue collection and it will be difficult to provide jobs, food and shelter for all in the future.

Instead of a wishy-washy Budget, maybe the Finance Minister should have taken the plunge and gone for a sensational Budget.

(The writer is a Senior Fellow with Observer Research Foundation)

Courtesy: The Pioneer

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