FM mixes prudence with sops in interim budget
Grabbing his last chance to please voters before the general elections, P Chidambaram on Monday cut excise duties on a range of consumer goods and cars, deft tweaks that could lift consumption and boost industry but leave his successor with plenty of headaches. Full Coverage: Interim budget 2014 | Mood in ParliamentUpdated: Feb 18, 2014 11:37 IST
When he stood firm and chose to open his government’s last budget despite noisy protests by some members on the Telengana state issue in Lok Sabha, it was a cue that finance minister P Chidambaram would go big on the element of surprise. And, it was.
Chidambaram had little legroom to splurge on vote-catching populist welfare measures. So, he slashed indirect taxes on a slew of consumer goods and cars, which will make them cheaper, while helping manufacturers.
It was a sign that he was willing to step out of his comfort zone in more ways than one. He based the first part of the UPA’s final budget on a cautious ‘stay-the-course’ approach, keeping in mind a still-fragile economy, rather than the upcoming general election.
There was little room to indulge anyway.
Yet, the finance minister, with some nifty tweaking, offered India’s vast consuming class and suffering industrial sector from some substantial relief.
This could be a masterstroke of sorts for a government about to face elections, but a potential financial headache for the next government, which will find much less revenue to begin with.
Besides, the tax cuts were only for a limited period—till June 30, 2014—could present the new government with delicate dilemma: to raise the taxes back to their original levels and risk fanning inflation or continue with the lower taxes and risk lower earnings.
The interim budget for 2014-15 presented in a concise speech that aimed at portraying the UPA as a skillful swan as he smartly hid flaws and played up "achievements" of the 10-year-old besieged government and rejected the surging criticism of policy paralysis.
“I reject the argument of policy paralysis. Just as there are business cycles, there is a cycle around the trend growth rate of an economy,” Chidambaram said listing out details of how the average growth during the UPA’s ten years since 2004 has been the highest.
“Let history be the judge of the last ten years,” he said.
Surprisingly, even as he gave a stirring account of the UPA’s ten-year record, his speech did not mention the government’s most flagship entitlement programme—the National Rural Employment Guarantee Scheme.
There was also no major programmes announcement for the social sector apart from moratorium on some education loans that could benefit nearly 9 lakh student borrowers.
In an obvious reference to Gujarat chief minister Narendra Modi’s comments that the country was run with hard work and not from University of Harvard, a reference to the finance minister’s education overseas.
“I may add, among other mentors, my mother and Harvard taught me the value of hard work,” he said.
Also, in an oblique reference to former Delhi chief Minister Arvind Kejriwal, he said: “Democracy acknowledges diversity, respects dissent, encourages debate, and decides through a government of elected representatives. Neither populism nor majoritarianism nor individualism is an alternative way of governance.”
He also offered a reason to smile for India’s armed forces accepting their long-pending demand for a one-rank-one pension scheme.
The slew of sops–four percentage point excise duty cut in small cars and motorbikes, six percentage point cut in SUVs and three percentage point in large cars-- is in effect a round of stimulus, the first since the 2008 crisis, albeit for only some industries industries, which means the current economic slowdown could be stickier than it appears to be.
A stimulus in the form of tax cut for companies will boost some fragile sectors, while they will also result in cheaper goods. This could be a masterstroke of sorts for a government about to face elections, but a potential financial headache for the next government, which will find much less revenue to begin with.
Moreover, the government managed to keep the fiscal deficit at 4.6%, notches below the a red line of 4.8%. With an untamed deficit, India could have faced a damaging “downgrade” by international credit rating agencies, fears of which seem to have been warded off for now.
The finance minister based his calculations on the assumption of a 19% growth in tax collections in 2014-15 on the back of 6.6% contraction this year, which may not be achievable in a slowdown year.
This has been aided by austerity measures to cut that have yielded spending cuts of Rs 75,000 crore, a successful auction of telecom radio waves and tailoring the fuel subsidy bill, which ended up lower because the government won't pay subsidies to petroleum companies this year.
He also announced tax cuts for mobile phones and rice warehouses and consumer items that could make clothes and processed food items cheaper.
The annual budget can raise or shave off people’s incomes. So, millions of Indians tune in to the widely anticipated budget speech, huddling around television sets in homes, offices and even tea stalls.
The finance minister did, however, use the occasion to present a 10-year report card of the economy, focusing the constraints the government has had to face, as he walked the talk on fiscal discipline through a set of carefully crafted arguments.
The finance minister also had something for those who were curiously peering into what could be bubbling inside the Congress poll manifesto-writing laboratory.
He listed inflation control, skill development, fiscal consolidation, infrastructure creation, urbanisation and targetted subsidy management and revival of the manufacturing sector were among the topmost priorities.
The next government will have to begin afresh on India’s two biggest tax reforms initiatives the Direct Taxes Code (DTC), aimed to overhaul archaic income tax laws, and the Goods and Services Tax (GST), which would stitch together a common national market by replacing a slew of different types of statelevel levies with a single national sales tax.
Chidambaram said that government would be able to contain the CAD --the gap between dollar inflows and outflows that are current in nature—within $45 billion from the record $88 billion or 4.8% of GDP last year.
Despite the austerity, the minister set aside ample resources to fund requirements under the signature Food Security Law, which will provide two-thirds of Indians, or about 800 million people, cheap food. The scheme will cost Rs 1.15 lakh crore to the exchequer.
The food security law, the largest such programme in the world, is one of the several rights-based welfare programmes of the UPA. The rural jobs scheme NREGA, enacted by the UPA in its previous term, is widely believed to have help it come back to power a second time in 2009. The road, this time, is paved with a lot of challenges, from a feisty main Opposition, BJP, to an economic slowdown and stubborn inflation.
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First Published: Feb 17, 2014 19:40 IST