It is in the fitness of things that Pranab Mukherjee can afford to be a minimalist 20 years after India began reforming its economy in 1991.
Mr Mukherjee is the midwife for a new rules-based tax regime and a considerable part of his energies are devoted to getting stakeholders — state governments for the goods and services tax and lobbying interests for the direct tax code — on the same page. He chose to use the hiatus before the changes are officially adopted to move the existing tax structure deeper into the new templates.
But inflation stayed his hand on raising excise duties to align with the eventual value-added tax rate once India becomes a common market. But he clamped down on excise exemptions, expanded the list of services that are taxable and collapsed customs duty slabs. The higher exemption in income tax and lower corporation tax surcharge alongside higher minimum alternate tax rates, likewise, dovetail into India’s vision of direct taxes. In sum, these changes are revenue neutral for the government.
The Centre’s spending plans do not lend themselves to such clean arithmetic. Government expenditure this year has overshot initial estimates by 9.72 %. Yet, Mr Mukherjee has budgeted for a mere 3.38 % growth for 2011-12. This year’s profligacy is camouflaged by a bonanza from the sale of radio frequencies for telecom, and the finance minister is keeping this tap open alongside the proceeds from divestment. In the event that the 2011-12 allocations for welfare and infrastructure are up by 17% and 23% respectively, and account for nearly 30% of total government expenditure, greater control is called for over revenue spending if the government’s more ambitious deficit reduction targets are to be met over the medium term. The revenue deficit does look a lot less unsightly after carving out the capital component in transfers to states. Yet, the Centre’s borrowing requirement of
Rs 3.43 lakh crore is big enough to crowd out loans to the private sector at a time when interest rates are climbing.
The rising list of entitlements — and the burgeoning subsidy bill — makes a compelling case for direct income transfers. A project that targets fuel and fertiliser subsidies better through cash handouts could be the fulcrum for future welfare programmes. Mr Mukherjee is characteristically modest when he says the big reforms are not the ones that make headlines but those that deal with the nitty-gritty of governance. His budget speech reflects this. His own ministry is bringing in legislation on insurance, pensions and banking apart from the goods and services tax. Agriculture gets funding in a raft of product- and area-specific schemes; there is easier tax treatment for cold chain infrastructure and the credit subsidy for farmers has been extended. Infrastructure funding has been made easier, transaction costs lowered for exporters, and manufacturing is promised a lower compliance burden.
Prices and corruption formed the political backdrop to Mr Mukherjee’s third budget for the UPA. The veteran parliamentarian showed a deft touch on both counts. He did his bit to not add to the inflationary pressure by declining to raise more money through taxes. The issue of black money is to be addressed through greater coordination with foreign governments and a study at home on ways to gouge out money stashed in hidden pools. This budget tries to dispel the spectre of a governance deficit, and succeeds in parts. The stock market’s reaction vindicates Mr Mukherjee’s efforts to move budget-making in India to a less arbitrary trajectory. It takes a mature hand to realise there’s no point in fixing what ain’t broke.