The nine Budgets that the UPA government has presented so far read like the rise and fall of the Mughal Empire. The UPA inherited a buoyant economy from the NDA in 2004. The buoyancy continued for four years until the fifth year, which was an election year. In that year, the government took liberties with the fisc that have created the current problems in the economy. Fiscal deficit, mostly revenue deficit, was allowed to go up by Rs 210,000 crore in one year or to 6% of the GDP from 2.5% of the GDP.
This huge fiscal expansion had its impact on inflation that started rising exponentially. This forced the Reserve Bank of India (RBI) to raise interest rates repeatedly. Money for investment by the private sector not only became unaffordable but also unavailable. For four years now, India has faced a huge fiscal deficit and the next year is going to be no different. This is clearly unacceptable. The cascading effect of this on the economy is easy to predict. Borrowing at this volume (Rs 513,590 crore which is one-third of the total expenditure of the GoI) will only add to inflation and crowd out private investment.
Higher inflation will deter the RBI from reducing interest rates, which will further discourage the private sector from making productive investments. This vicious cycle will impact growth and the 7.6% growth rate predicted for the next financial year will remain a dream.
The fiscal deficit of 5.1% is despite a massive tax raising effort by the finance minister. He has imposed a burden of
Rs 45,940 crore on the aam aadmi by raising indirect taxes. A tax effort of this kind is unprecedented. This coupled with the R20,000 crore burden imposed on freight by the Indian Railways and the passenger fare hike are going to put a massive burden on our people.
I wish the finance minister had considered for inclusion some of the recommendations of the Standing Committee on Finance on the Direct Taxes Code. There was nothing to prevent him from introducing a central GST in this Budget, especially when he converged both the tax rates at 12%.
He has brought back a discretionary approach to taxation. I had cleaned up the indirect tax regime during my time by doing away with this kind of discretion on the part of the minister. There was no long list of items on which excise was raised or reduced.
The Budget is silent on the issue of economic reforms. The disinvestment plan from which the finance minister expected to raise R40,000 crore during the current year has been a dismal failure. If the LIC had not been brought to pay the government through the Oil and Natural Gas Corporation, the receipt from disinvestment would have been a pittance.
The fragility of the political situation has clearly had its impact on the general budget. Pranab Mukherjee did not want to go the Dinesh Trivedi way.
Yashwant Sinha is a BJP MP and former finance minister of India. The views expressed by the author are personal.