The initial let-down after the first budget of UPA II had more to do with unrealistic expectations than with any disinclination to reform the economy. Anticipation has been building up over the past five years, and Pranab Mukherjee — likely to be finance minister for the next five — was seen as taking a strong pro-reform stance in his maiden Budget for this government. The reforms are there, but not in your face. The finance minister’s touch is a subtle one and the fiendishly complex job of keeping the economy afloat while delivering on a populist mandate becomes evident on reading the detail.
So disinvestment is on, fiscal responsibility is to be redefined after the 13th Finance Commission submits its recommendations, oil price decontrol is referred to an expert group, a common goods and service tax is likely by next April, takeout financing is on the cards for infrastructure projects, a direct transfer mechanism is being drawn up for fertiliser subsidies, more stock will be floating in the bourses, a gas grid is on the drawing board, consultations are on for a direct tax code. Read that last sentence again and it is a mighty agenda. Reforms, as Mr Mukherjee reminds us, is a process, not an event.
For the Kautilya-quoting politician, the constituency for reforms is as important as reforms themselves. If income redistribution helps the aam aadmi see the logic of growth-enhancing structural adjustments, that is where Mr Mukherjee is putting his money: the Rs 120,000 crore he is funnelling into flagship social security schemes this year. In villages, the employment dole is up by 144 per cent, roads get 59 per cent more, electrification 27 per cent and housing 63 per cent. Furthermore, farmers will continue to get subsidised credit and more time under a debt waiver. With subsidies at Rs 111,276 crore, four out of every ten rupees Mr Mukherjee is spending are borrowed and two of them go towards welfare.
This heroic social security agenda is aided by the need for fiscal expansion in a slowing economy. In a year when tax revenues are set to stagnate — collection of income tax, customs and excise duties is projected to decline and the service tax revenue mop-up will remain static — the fiscal deficit will hit 6.8 per cent before the year is out, and with the leeway to states to borrow more, the combined Centre-state deficit will nudge 11 per cent. Within this, sectors facing the brunt of the global recession get to keep their handouts for a while longer and infrastructure spending is bumped up. The principal alternative revenue stream, disinvestment, is unlikely to reflect in the Budget; any proceeds will find their way to a fund for social welfare schemes. The sale of radio frequencies for next generation telecom services has, however, been factored in.
Given the spending imperatives — both economic and political — Mr Mukherjee’s tax changes have been designed to be revenue neutral. Altered exemptions and surcharges in income tax will bring relief across the spectrum, while a higher minimum alternative tax will furrow a few eyebrows in boardrooms. Customs, excise and service tax have had a few kinks ironed out of them and there is a welcome convergence to a single tax rate for manufactures. Imposts placed by predecessor P. Chidambaram have been jettisoned because they were impractical, like the fringe benefit tax, and because they were too onerous, like the tax on commodities transactions.
On the three challenges confronting Mr Mukherjee — regaining 9 per cent GDP growth, making development inclusive and improving the government’s delivery mechanism — much more can reasonably be expected to be done in next year’s Budget. The economic and regulatory landscapes should be quite different. The finance minister, as well as the market, will also have a longer gearing time to manage expectations. Reforms do not follow the fiscal calendar; if a majority of Monday’s announcements do get converted into actionable points over the next nine months, the economy would have shed some trenchant rigidities. After all, an election promise — subsidised grain for the poor — too has to wind its way through a legal labyrinth before it gets delivered.