If you combined the words, ‘good’, ‘bad’, ‘resonant’ and ‘yawn’, you would get a complete typology of each of India’s Union budgets. There are a few that are ‘good’ and ‘resonant’ — such as Manmohan Singh’s first two budgets and P. Chidambaram’s so-called dream budget. There are those that are ‘bad’ and ‘resonant’. I can think of at least five such since 1991, and I shan’t name the finance ministers concerned. There are many budgets that are ‘bad’ and a ‘yawn’.
This Budget of Pranab Mukherjee’s is a strange one: other than the size of the fiscal deficit, I think it is generally ‘good’ but also a bit of a ‘yawn’. Since Mukherjee completed his budget speech, I’ve been asking myself: ‘Is this a tactical yawn?’
Let me explain. There are many things in the Budget that were anticipated, given this government’s commitment to inclusiveness. For instance, we expected a sharp rise in expenditure on the National Rural Employment Guarantee Scheme (NREGS). This happened with a 144 per cent hike in the NREGS outlay to Rs 39,100 crore. So, too, the schemes under Bharat Nirman, whose overall allocation has increased by 45 per cent. Ditto the National Rural Health Mission, which now gets over Rs 14,000 crore for the year.
Most economists believed that the Budget would significantly increase allocations on highways, railways and urban infrastructure. These happened as well. The National Highways Authority of India has got 23 per cent more than last year; railways have received a generous dollop of funds; and the Jawaharlal Nehru Urban Renewal Mission has had its financing stepped up by 87 per cent to Rs 12,887 crore.
We expected it to be an expenditure-driven Budget. And it was. But to have total expenditure at Rs 10,20,838 crore (yes, that’s ten lakh twenty thousand eight hundred and thirty eight crore of rupees!) — which is 36 per cent higher than the budget estimate of 2008-09, and 13 per cent over the bloated revised estimate, was something else altogether.
Clearly, the Budget called for some efforts at raising revenues. It is here that we heard enigmatic silences. Mukherjee steered away from making hard revenue choices. At least for now.
n He wants to return to the Fiscal Responsibility and Budget Management (FRBM) Act “at the earliest”, but he doesn’t say when.
n He intends to “move towards a nutrient based [fertiliser] subsidy regime instead of the current product pricing regime”, but we don’t know when.
n He intends to “set up an expert group to advise on a viable and sustainable system of pricing of petroleum products”. But the Sundararajan Committee had prepared an outstanding report during Atal Bihari Vajpayee’s regime, which was nixed by Ram Naik and continues to gather dust at the Ministry of Petroleum and Natural Gas. Do we need yet another committee? Or can we quickly revise this report for circulation and rapid implementation?
n He wants to encourage “people’s participation” in the disinvestment of public sector companies, but does not set a revenue target anywhere in the budget document.
Not surprisingly, therefore, that the central government’s fiscal deficit for 2009-10 is Rs 400,996 crore. That’s 23 per cent higher than even the revised deficit for 2008-09, and is estimated at 6.8 per cent of India’s expected nominal GDP.
I am worried about this. In addition to the Centre’s deficit of 6.8 per cent of the GDP, the Budget has given the states permission to borrow up to 4 per cent of the GDP. Thus, we are looking at a combined deficit of 10.8 per cent. Add another 0.5 per cent on off-budget items, and the number tots up to 11.3 per cent of the GDP. That’s large. We may very well grow ourselves out of trouble. But that’s a leap in faith — one best not leapt by prudent finance ministers. Besides, deficits are addictive, and the system is loath to let them go. Diabetics should not be allowed to dip their hands in candy jars.
Why then do I call this Budget generally good? And think of it as a tactical yawn? Because of five reasons. First, the nominal growth rate (real plus inflation) for 2009-10 is assumed at 7.9 per cent. That’s low. India will probably grow by 6.5 to 7 per cent real. Add another 5 per cent on account of inflation and we are looking at 11.5 to 12 per cent nominal GDP growth. This additional growth can temper the deficit.
Second, I am betting that many expenditure items will remain unspent. The expenditure department of the finance ministry is very good at not releasing cheques.
Third, I am delighted that Mukherjee has got rid of the vexatious Fringe Benefit Tax. It not only shows his fiscal savvy, but also his not bothering about overturning something that his predecessor from the same party introduced a few years ago. Clearly, pragmatism means more to Mukherjee than dogma.
Fourth, because he will net some Rs 8,000-Rs 10,000 crore from disinvestment in 2009-10.
And fifth, because I think we will see much more on the revenue and reforms front in the months ahead. The fact that Mukherjee proposes to release a Direct Tax Code for discussion within 45 days, and introduce a Direct Tax Code Bill in the winter session of Parliament suggests that he wants to clean up the plethora of tax exemptions, and effectively increase the corporate tax collection rate from 22 per cent today to near about 30 per cent in the medium term.
Mukherjee is much like his muse, Kautilya — canny, clever and pragmatic. He covered his tracks quite well by saying, “Members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.” That’s why he didn’t speak about increasing the FDI limit on insurance to 49 per cent. That’s why he didn’t announce sweeping tax reforms. That’s why he didn’t set the Yamuna on fire. And that’s why I believe that Union Budget 2009-10 was a tactical yawn. Time will tell whether this was tactical; or just a plain, boring yawn.
Omkar Goswami is Chairman, CERG Advisory Private Limited.