Dinesh Trivedi, after biting the bullet at his own discretion as Railway Minister, may get the bullet surgically removed and wait for rehabilitation. Dinesh tried to get 3% extra revenue by raising passenger fares. Net extra resource mobilization by Pranab Mukherjee will be even less than 3% of his total budget size. Pranab could not bite the bullet the way his current Prime Minister did when the latter was 20 years younger. He has just two more Budgets in 2013 and 2014 if he fails to become the President meanwhile and then retire in 2015 as one of the most experienced ministers in India, awaiting some lifetime awards. Today, he had a few difficult things to deal with: to turn the fiscal deficit down, allure exports to bulge to contain worsening current account deficit, find a breakthrough from the roughly equal division of 14 % money income growth into 7% growth each in real GDP and price level. He used 120 minutes of the customary brilliantly crafted speech as part of Parliamentary process to follow the standard Bengali ‘thor bori khara, khara bori thor’ recipe, to offer his countrymen a run-of-the-mill meal with sweet & sour appetiser soup during March 16 lunch hoursl, leaving the economy slog on its own as it had been doing in the past eight years.
His 2012 Budget gave a lip service to the economic columnists’ prescriptions: fiscal deficit will continue to be high at 5.1% in 2012-13 compared with 5.9 % for the year that ends this month – far higher than the 3% ideal that the country has long been waiting to achieve. I hope that the Reserve Bank of India gets satisfied with this 0.8% point budget reduction in fiscal deficit to cut interest rates since it is not accepting the argument that India’s inflation being mostly structural in nature, higher interest rates hurt only growth rather than help reduce inflation.
The current account deficit does not get any strong kick to shrink from the high level of 3.6%. The Budget does not show how the current gap of 6% points between export and import growth rates will be narrowed. The subsidies may not continue grow as the Finance Minister promises to keep the subsidy bill below 2% of GDP. It is to be seen how he responds to the likely opposition party demand for restoring the proposed 14% cut in subsidies on fertilizers, LPG and diesel. Even if he keeps the subsidy bill at the last years level, it would be good beginning. The expansion of the service sector tax base and the 2% point rise in the service tax rate to 12% and the complete withdrawal of the excise reliefs granted in 2008-09, together with increased subsidies and higher allocation on inclusive growth will not result in any anti-inflationary of the Budget: rather all this may marginally stoke the intensity of the fire of inflation currently ruling at about 7%, though considerably lower than the inflation rate a year ago. The Finance Minister expects the inflation rate to comedown in 2012-13. He also predicts a real GDP growth of 7.5% in 2012-13 compared to less than 7% this year. India has no way of accelerating economic growth in the next two years to return to 9% plus annual growth trajectory.
The stalemate on further economic reforms will continue till a major economic bankruptcy afflicts India again. Till that time, the Finance Minister will depend on the MPs to pass the amendment bills and new legislations in respect of pension regulations, banking, SIDBI, NABARD,, micro-finance regulation, NHB, regional rural banks, enforcement of security for interest and debt recovery and stamp act. He also hopes that the States and the legislative will clear to enact good & services tax and direct tax codes.
There is nothing significant in the Budget that would spur private sector. There is nothing to indicate the large public sector units are in substantial capacity creation investment activity either. The Finance Minister does not seem to mind a slower investment growth and a weaker expansion of the country’s medium-term growth potential. He seems to be satisfied that the large number of machinery import customs duty reductions and reliefs would usher in industrial investment in a major way.
Even if the Budget fails to cheer up the industrial sector in general, especially when the interest rates do not have a chance to start a quick downward movement, many other stakeholders will rejoice: income tax-payers will welcome the small tax reliefs of a maximum of Rs22,000 per year, even without investing in tax-free bonds or equity, for which the Finance Minister has announced special schemes. Stock markets brokers and retain investors will be happy with a dramatic reduction in the securities transaction tax: hopefully, stock market turnover would go up substantially.
But the Finance Minister has not lost focus on what he could do on his own: increase spending on stakeholders in rural areas and agriculture as also women, people below the poverty line, child and mother nutrition and health, education, vocational education, drinking water, employment guarantee, rural roads, etc. All these will have long-term positive impact on the society and productivity of the people at the bottom of the pyramid. All this spending also keeps the voters and the legislators happy. One of the fundamental features of Indian budgets will be this: spending all the way for inclusive growth by raising revenues or borrowing. At the same time, the Finance Minister has done whatever possible to enhance the effectiveness of these spending by better targeting of beneficiaries and controlling leakages. He has announced various government initiatives to use modern technology and unique identification facility including direct transfer of subsidy amounts to the bank accounts of the intended beneficiaries. This should help him contain the leakage of subsidies and reduce the subsidy bill. Within the finance ministry, he has continued efforts to simply forms, ease refunds, reduce speedy disposal of disputes. That is a special redeeming feature of his Budget.
The Finance Minister cannot do all things: he cannot solve land acquisition hurdles to industrial and infrastructure projects, he cannot pave the way for change in labour laws either. And, while ensuring that a longer smoke cost about 5% more, adding descent additional revenues, and assuring all a free white paper on all money painted black, he has proposed a few smart amendments to the Fiscal Responsibility & Budget Management Act as part of the Finance Bill to enhance its usefulness.
