JULY 06, 2009

Budget 2009: A quick evaluation of impact vs expectations

By M G Venugopalan, Former CBEC Member

THE FM started his budget speech with the right note - budget speech is not all that  important-not all policy announcements can be  expected in the budget- absolutely true! So let us not have exaggerated expectations out of this budget. FM has been true to his words. As usual, the gap between the  ‘Economic Survey’ –  an excellent document and the budget speech is very wide !- Obviously the two documents are prepared by two different authors. There is no great vision in this year’s budget or any new thrust into any areas of the economy, hitherto not covered.

What  has  been the immediate impact of the budget ?  Stock market prices are down by about 850 points by 3 PM. It is not a ‘big bang’ or a ‘dream budget’ as widely expected by the Channels and the Corporate world. Common people did not expect much from this budget as three days prior to the budget they got a punch on their face by way of Rs 4 /2 per litre  hike of Petrol/Diesel prices.  Over all, the budget is balanced, prudent and may be a timid to some extent. It lacks a clear focus, its philosophy is vague and the road maps for achieving the targets are unclear. There seems to be a drought on new ideas in the budget!

But it is an ambitious budget aimed at 9%  GDP growth. For achieving this  target ,the Central Govt’s fiscal deficit is jacked up to a high level  of 6.8%.Actual fiscal deficit  in the economy, with the Sates figures added, would be over 14%. Where are the resources to meet the record level of expenditure bill of over Rs. 10 lakh crores. The receipts from Direct taxes changes are revenue neutral- indirect tax changes would bring in an additional revenue of Rs. 2400 crores only. So  the resources gap is being filled up by increased market borrowing- a rise of over 300% over the previous year in internal borrowing. This will clearly crowd out private investment .

The budget seems to have left  out all  crucial decision making areas of the economy into the hands of  several Expert Committees,  the Finance Commission or other Ministries concerned.  So there is clear lack of clarity in respect of many of the announcements made in the budget. There is however continuity, stability in respect of the fiscal stimulus already announced in the interim budget. Fortunately the budget` is not out rightly negative on any front.

 On the taxation front there has been no major announcements of any reform except the reiteration of introduction of GST w. e. f April, 2009, new Direct Taxes Code within next 45 days,  abolition of FBT/CTT, income tax exemption  raised by a meager  Rs. 10,000/-and retention of the lower excise duty/service tax rates announced in the interim budget.  The much awaited  next generation of ‘reforms’ on the taxation front is not there.

What would be the impact of the budget on the prices front ? The financial media  and the left front leaders have been highlighting the wide hiatus between the negative growth of WPI and the soaring of CPI, in two different directions. The budget has not even recognized this contradictory anomaly on the prices front or the need to reconcile the divergence.  In all probability the prices of all essential goods and travel  would  go up by about 10% or more immediately due to the rise in diesel/petrol prices. Apart from the above, the budget ,as such, may have neutral impact on prices, except in respect of items where indirect taxes are raised.

Is there anything concrete for the common man in the budget-nothing much except disappointment! There is nothing tangible except the excise exemption granted to some life saving drugs, equipments and branded jewelry. But gold and silver prices would go up due to increase in the customs duty! The PM has commented that the budget seeks to bridge the gap between “Bharat” and “India”. Well, that could be justified from the point of view of higher financial allocations to schemes like NREGP/ JNRUMP etc. There would be larger transfer of funds into the rural economy- the purchasing power and demand  from  our  rural  areas would rise . When  our exports  are sluggish, the rising domestic demand from the rural areas  would certainly keep the manufacturing/FMCG sector buoyant.

 What  are the specific measures intended for the flow of  global investments into India. There is nothing specific for promotion of  FII/FDI investments. The much awaited announcement on raising the FDI cap in the Insurance and Retail sector are not there. On top, the rise in the MAT rate from 10 % to 15% and retention  of 10% surcharge on the Corporate Tax are clear disincentives. So the anticipated flow of foreign direct / institutional  investments into our mfg/financial sector may not take place. After the global melt down, the buoyancy noticed in the economies of  BRIC countries during the last two quarters brightened the prospects of larger inflows of financial resources into India. That dream may not now materialize.

What is there in the budget for the domestic corporate sector ? Nothing much except that the Excise/ Service Tax rates lowered substantially in the interim budget, largely remains undisturbed.  That could be taken as continuation of the fiscal stimulus granted to meet the shock of global recession. No doubt, two major irritants like FBT(minus ESOP and retirement befits) and CTT have been abolished. But the MAT liability of Corporates has been raised by 50% with increase in the period of adjustment of accumulated losses from 7 years  to  10 years. Many industrialists who appeared in the TV had a sigh of relief-Thank God  there is nothing worse in the budget. Another major irritant removed from Direct Tax payers  whose taxable income is upto Rs.40 lakhs (over 90 % of the tax payers may fall under this slab) is dispense with the maintenance of books of accounts/auditing etc if a small presumptive tax is paid.

As anticipated, allocations into social sectors have been hiked. But the delivery mechanism of the Central and State Govts. remain as rickety as ever. Recommendations of the Administrative Reforms Commission  running into several volumes ,  submitted years back, remain intact without any  announcement of its implementation. This is a core area for the success of our massive developmental efforts.

 Food security is sought to be assured by making the grant announcement  that all BPL families would be provided with 25 Kgs of rice/ wheat at Rs 3 per kgm per month. But several States like AP, Tamil Nadu, Kerala, W. Bengal etc  have already implemented the scheme of making available food grains to BPL families at Rs. 2 per Kgmor less. So how  would this scheme announced by the Central Govt gel with  schemes of the State Govts. No word about the money required for procurement of such large quantity of food grains  for public distribution. The subsidy gap for meeting this item of expenditure  for  each BPL family would come to about Rs. 360 per month. The food subsidy may rise substantially far beyond the present levels. The relevant legislation to be passed in this regard is still in the files of  Min. of Agriculture. There are wide divergence in the views expressed by Ms.Sonia Gandhi and Mr. Sharad Pawar. GOI  may not  have done its home work well before making this dramatic announcement.

What is there in this budget for our much awaited  growth of infrastructural sector. Well,financial allocations have all been increased within the   constraint of resources. Our new Surface Transport Minister, Mr Kamal Nath wants to raise the target of completion of our NH widening work  from 7 KM  per day to 20 KMs. But there is no matching financial support for meeting this ambitious target.  Acquisition of agricultural land  for road building  and other development remains  a major problem  in all States due to public resistance .Rehabilitation of people affected by land acquisition remain sore points for  State Govts.alone to handle. There is no solution in the budget on these crippling areas of administration.

For the agricultural sector there is no sensational announcement for  ordinary farmers  except 1% interest subsidy for those who repay their loans promptly.  After the much celebrated loan write off of last year, farmers would now wait for the next write off ! There is  some increase in credit availability to the agricultural sector and income tax exemption to investors in clod storages etc. But these measures will only have marginal impact. There is no specific measure for increase in agricultural productivity, induction of improved technology and R&D efforts into the agricultural sector or incentives for   packaging industry to prevent 40% loss of fruits/vegetables/seeds grown in the country etc.

On the whole the budget has not risen to the expectations of large sections of our people. This would be duly reflected in the budget debates that would take place in the coming days in the House. The normal tendency of the Govt. would then be to announce more populist measures, which would push the Govt. still far away from the FRBM targets  and further slippages in our fiscal deficit.  It does not augur well in the area of macro economic management of the economy on its fundamentals.