This is probably the last budget as we know it. If things work to plan, India’s finance minister will have ceded a significant part of his discretionary power over tax rates when Pranab Mukherjee rises to present the budget for 2011-12. A single tax on goods and services across the land will be set by a collegium of ministers from the states and a code on taxing incomes will dictate rates and slabs. This year’s budget paves the way for a turning point in the republic’s history. By widening income tax slabs on the one hand, and raising the indirect tax rate on the other, Mr Mukherjee is ushering in a new era that will become official once the necessary legislation is in place, hopefully in the next 12 months.
The regime change also envelops a calibrated rollback of the economic stimulus. Shifting the incidence of tax from income to consumption should nurse the recovery along while improving the fiscal balance. The risk in this gambit is to the price line as producers, notably oil companies, pass on the higher tax and neutralise the gains of larger disposable incomes. With inflation the foremost concern, the cost of fiscal consolidation could be pretty high.
Mr Mukherjee has dipped into non-tax receipts like divestment and spectrum auction proceeds to shave a percentage point off the fiscal deficit, but the government must realise these revenue streams are not in perpetuity and cannot be a substitute for expenditure control.
A beginning has been made in explicitly accounting for subsidised fuel and fertilisers. Yet overall, subsidies are stubbornly stuck at 10 per cent of total government expenditure while capacity building in infrastructure needs another 15 per cent and interest payments an additional 22 per cent. As welfare entitlements become legally enforceable, the onus will be on cutting back revenue expenditure. Yet the finance ministry’s zeal is directed more towards pruning the fiscal deficit in the medium term than the more worrisome one in revenue. One in three rupees Mr Mukherjee spends this year will be borrowed, a prospect the bond market has greeted with trepidation. The stock markets, though, find cheer in a lower corporate tax surcharge and a conditional withdrawal of the excise giveaway.
Surprising, because the bourses had dipped after last year’s budget despite it having a bigger reforms agenda than this one. Disinvestment, oil and fertiliser price decontrol, greater access to foreign investment, easier infrastructure finance and tax reforms are all works in progress. This year Mr Mukherjee has, understandably, turned his attention to farm productivity and food management. Banks will be recapitalised and a super financial watchdog created, coal blocks auctioned under scrutiny of a regulator, and a fund set up to foster clean energy. A bigger reforms push in a year when state elections do not cast much of a shadow seems to have yielded to the more pressing demands of reviving growth and making it more inclusive.
After employment and education, the UPA is moving to make food security an entitlement. Spending on social security, including flagship programmes like the unemployment dole and Bharat Nirman, is now up to 12 per cent of total expenditure. A quarter of plan spending is on rural infrastructure. Given the sums involved, Mr Mukherjee’s third guiding principle in making this budget assumes salience. “If there is one factor that can hold us back in realising our potential as a modern nation, it is the bottleneck of our public delivery mechanisms… we have a long way to go before we can rest on this count.” India cannot tarry its tryst with destiny.