With an expenditure of more than Rs 10 trillion (Rs 10 lakh crore), India’s biggest-ever budget had much for the UPA government’s recent votebank --- the aam admi. But it wasn’t just the 4 per cent farm growth, interest subsidy for farmers or housing and basic amenities for the urban poor that Pranab Mukherjee’s budget focussed on.
Token tax breaks added a whiff of relief to the middle class. Raising the tax exemption limit by Rs 10,000 will help people get a benefit of Rs 86 per month. Similarly, the savings for senior citizens (by increasing exemption by Rs 15,000) will help them save Rs 129 every month.
<b1>For the corporate sector, the removal of fringe benefit tax (a tax on perks that has been gnawing the insides of the sector ever since Mukherjee’s predecessor P Chidambaram introduced it in February 2005) should provide some respite. As should selective tax cuts for products like set top boxes and LCD TVs. Or the budget’s thrust on infrastructure that will help finance projects in roads, airports, telecom and power through public-private partnerships worth Rs 100,000 crore.
And while the increase in minimum alternative tax from 10 per cent to 15 per cent could irk some companies, they can now offset it against future actual taxes for a longer period of 10 years. In fact, the corporate sector is by and large quite contented with the budget.
Not so the financial sector, which, after demanding and getting a stimulus package in the form of lower duties, is not willing to accept the fiscal responsibility that comes with it. The market’s barometer BSE Sensex fell 870 points because India’s fiscal deficit will almost touch 7 per cent, an 18-year high.
But what investors are blatantly overlooking is the fact that 3.5 percentage points of this rise has come on account of fiscal stimuli worth Rs 1,86,000 crore — much of which has been pocketed by the same participants.
Yes, the danger of a high fiscal deficit is clear and present --- as the government begins to borrow in huge numbers, private companies get squeezed out of the market, and increase their cost of doing business. In a double whammy, rating agencies could lower India's sovereign rating, thereby raising the interest rates in the system. On a pragmatic front, a higher fiscal deficit is something the whole world is beginning to live with.
So, what Mukherjee is gambling on is that the cost of a higher fiscal deficit through investments in infrastructure and the rural economy will generate a return in the form of higher growth. If this gamble does not work out, India could be saddled with high borrowings and interest rates. If growth suffers as a result, it’s a financial precipice we’re standing on.
The bad news factored in, Mukherjee’s 1 hour 39 minute speech carries hope. He is banking on growth by financially repairing the agricultural and rural economy, the urban slums by increasing allocation for housing for urban poor, exports and investing much of that in sectors like roads, airports, telecom and so on that provide growth multipliers to the economy.
Mukherjee paying glowing tribute to Indira Gandhi’s nationalisation of India’s banking sector — the 40th anniversary of which comes in the middle of next week — and saying that banks and insurance companies will not be disinvested should taken with a pinch of political salt. At the HT Leadership Summit in November 2008, Congress president Sonia Gandhi had pretty much said the same thing.
Mukherjee’s great gamble affects us all. The only way out we can crawl out of the huge deficit is by growth. On the bright side, India remains the world’s second fastest growing significant economy. Let’s pray it continues to remain so.