The finance minister, P Chidambaram, managed to present a fairly balanced Union Budget. The stock markets initially treated the budget as a non-event. There were no big unforeseen surprises and it was relatively measured given that we are in a pre-election year. It is hard to ignore that the global economy continues to be in turmoil. The Central statistical organization (CSO), in its advanced estimate pegged India's GDP growth at a modest 5% for the current fiscal. Committed solutions are required to comfortably decouple from global trends.
The announcement that the fiscal deficit has been reigned in well within the targeted levels to 5.2% is good news. A continued commitment to eliminating the revenue deficit over a fixed time horizon is even better news. After over a decade of expansion of the real economy and domestic consumption, the Indian economy is now at a veritable crossroads. The government has to urgently create viable investment opportunities and support long term gross capital formation.
Households must be able to derive value from productive assets, and Chidambaram rightly noted that they "must be incentivised to save in financial instruments". The proposals to introduce inflation linked instruments and create a new debt segment in national exchanges will certainly aid such objectives; and concomitantly contribute to the sustainability of the current account deficit.
However, an unwavering systemic emphasis on well regulated, competitive and transparent markets with reduced transaction costs is still required. Industrial growth, particularly manufacturing sector growth must underpin resilient GDP growth. The Micro, Small and Medium Enterprises (MSME) sector has a crucial role to play in enabling this, and the extension of benefits for a period of 3 years after graduation to a higher category bodes well for increased participation and interest in the sector.
In consonance with popular sentiment, Chidambaram laid out a three-pronged development approach, emphasising empowerment of women, the youth and the poor. Some of the initiatives that are circumscribed within this approach include the setting up of a public sector women’s bank with an initial capitalisation of Rs. 1,000 crore; a Nirbhaya fund of a Rs. 1,000 crore; emphasis on skill development and the development of a skill-based curriculum; and the assurance that Direct Benefits Transfers will roll out “during the term of the UPA”. While the existing 173 Centre-sponsored schemes will be reduced to just 70, subject to review every two years, the Rs. 5.5 lakh crore figure for planned expenditure reflects an approximate 30% jump over revised estimates.
Within the context of revenue generation imperatives to offset increased expenditure, the fact that both direct and indirect taxes have remained relatively untouched, is certainly progressive. The budget is not practically feasible unless there is enhanced private sector participation, stability of long term capital inflows, expansion of the tax base, and effective control of the price level. This in turn requires recalibration of priorities — and a shift from short term focus to a medium term focus, and a tempered pre-election budget is a step in the right direction.