Indian Budget 09

editorials

Smoke and Mirrors in the Union Budget Budget 2009 claims to use fiscal expansion to prop up growth, but does it do enough on this score?

F

or one brief moment, Union Finance Minister Pranab Mukherjee seemed willing to put the annual ritual in its place. “…a single Budget Speech cannot solve all our p­roblems…” he said, signalling his readiness to swim against the once-a-year tide of media and market hysteria about “The Budget”. But it was only a moment. Soon the finance minister lapsed into the budget tradition of smoke and mirrors: comparing like with unlike, going beyond the facts and trying to offer a little bit for   everybody. It was in the end a strange exercise. At one level, Pranab Mukherjee seemed to give expression to the feeling in a section of the Congress Party that it owed its victory to its “aam aadmi” programmes and should therefore focus on them. Hence the (promised) expansion of welfare programmes, the willingness to put growth over the needs of fiscal funda­ mentalism and the u­nwillingness to do what the stock market expected from the Union Budget for 2009-10. But the first budget of the second United P­rogressive A­l liance (UPA) government has two faces. It has budgeted for a larger fiscal deficit, but it does not reject fiscal f­undamentalism. It only postpones the planned reduction of the fiscal deficit to the f­uture. It reiterates government majority o­w nership of banks, but makes it clear that the broader process of disinvestment (“people’s participation”) is on the agenda. It speaks about new and expanded welfare programmes, but makes inadequate p­rovision for them. If there is a central idea that marks Budget 2009 out from its more immediate predecessors, it is that it places an emphasis on using government spending to sustain growth. This is a logical follow-up to the changes in the growth process that took place during 2008-09 when the global crisis hit Indian shores. The E­conomic Survey 2008-09 has pointed out that the usually large contribution of private consumption to growth collapsed last year. If the economy yet grew by 6.7% it was because g­overnment  consumption compensated with a larger than u­sual  contribution to growth. Since the crisis is not yet behind us, it makes perfect economic sense that the budget provides for increased government outlay – preferably on i­nvestment – to boost demand. This is what the Budget 2009 tries to do, but does it do enough? The finance minister claimed that gross budgetary support for the Central Plan would go up by Rs 35,000 crore in 2009-10 (budget estimates or BE) when compared to the 200809 r­evised estimates (RE). However, total Plan expenditure – on the Central Plan and on assistance to the State Plans, which is the larger figure and therefore what matters – is b­udgeted to rise more slowly in the current fiscal year compared to last year: 14.9% (2009-10 BE over 2008-09 RE) versus as much as 36.3% (2008-09 RE over 2007-08 actuals). Pranab Mukherjee would be right in arguing that 2008-09 was

6

exceptional. He could also argue that just as the UPA-1 g­overnment went beyond the 2008-09 BE allocations it will be   able to do the same this year. The finance minister could also point out that the slowdown and the tax cuts have affected the centre’s revenues and therefore limited the room for fiscal expansion. True, collection of all taxes other than on services were, a­ccording to the 2008-09 RE, lower than budgeted and the 2009-10 BE are c­autious in projecting growth only of corporation tax revenue. The question then is why, in these difficult times, has Budget 2009 given significant tax concessions? The surcharge on taxable incomes of more than Rs 10 lakh a year (the cream of Indian society) will result in an annual loss of Rs 10,000 crore. The abolition of the Fringe Benefits Tax – which, it is claimed, will now fall in another form on employees – will mean the loss of another Rs 7,000 crore. These are not small amounts. These d­ecisions perhaps symbolise a­nother aspect of Budget 2009 – that in the end the UPA-2 g­overnment cannot quite hide where its heart lies. The unwillingness to tap all sources of tax revenue also means that the government has to embark in 2009-10 on its largest ever borrowing programme of Rs 4,00,996 crore. The fears of the market about the impact of borrowing of this m­agnitude may be misplaced. Yet the overall (self-imposed) constraint on resource mobilisation means that many of the so-called “flagship” p­rogrammes have been left under-funded. The National Food S­ecurity Act is to be legislated, but the budgeted increase of Rs 10,980 crore in the food subsidy this year is grossly inadequate for a programme that will provide 25 kg of cereals to all families below the poverty line at Rs 3 a kg. The wage rate paid under the National Rural E­mployment Guarantee Scheme is to go up from Rs 80 to Rs 100 a day, but the budgeted increase in allocation is only Rs 2,350 crore over the Rs 36,750 crore spent, according to the 2008-09 RE. Likewise, the allocations for p­r imary e­ducation (for which the Right to Education Bill is to be finally enacted shortly) and the Integrated Child Development S­ervices scheme are far below what will be required for the promised universalisation. To be fair to the Ministry of Finance, under-provision in the budget has not stood in the way of a subsequent step-up in a­l location. Last year, for instance, Pranab Mukherjee’s prede­cessor said the NREGS would be introduced in all districts, but the budget provided for a mere Rs 180 crore increase. Under p­olitical direction, funding rose during the course of the year by Rs 22,350 crore. This may well be r­epeated this year. A different question then arises: What i­ntegrity does a budget have if  a llocations in important areas are only one-third of what is required? july 11, 2009  vol xliv no 28  EPW   Economic & Political Weekly