Budget 2010: Little Hissing, Maximum Fur
Pranab Mukherjee’s budget takes more than what it gives; but for the right reasons
Nineteenth Century magic lovers were often treated to the Great Indian Rope Trick, which began with the magician throwing up a rope in the air. The rope twisted and stretched like a serpent and seemed to vanish into the sky. The magician climbed the rope and vanished too, only to reappear on the ground a few moments later. The crowd went bananas little realising it had been subject to one of humanity’s greatest illusions.
Indians woke up on Friday morning expecting no such trick to be played upon them. After all, this year’s budget was expected to be either a dull or frighteningly inflationary affair. They expected concessions to be withdrawn and taxes to go up. There would be no welfare announcements or key reform measures. The stock markets, an inexact but a very popular barometer of budget performance, would plunge more. It was a Friday to be sat out before a long, festal weekend.
But as the budget speech began, it was as if the rope went up in the air. Finance Minister Pranab Mukherjee, the one-man crisis management team for the Congress Party, rose to the occasion again. He thrilled tax payers by raising the upper limits for two income tax slabs. The companies were left happy with a cut in the corporate tax surcharge. The farmer got more time to repay his loans and a promise to substantially increase farm credit to Rs. 375,000 crore. The government’s inclusive growth agenda got as much as 37 percent of the plan outlay. The right to education initiative and the unique identity programme got enough money to go on stream. The banking and retail sectors rejoiced as the minister committed to opening them for more competition and investment. There seemed to be something for everybody and it almost looked like a generously “giving” budget.
Except that it was a “taking” budget all the way. Even as the crowd listened in a trance, Pranab Da climbed down to the ground and implemented his real agenda: fiscal consolidation and discipline. He took back almost double of what he gave away in direct taxes through indirect ones. He made a sweeping attack of the petroleum sector – the cash cow that it is – to raise additional revenue. He adopted a fiscal stance even more conservative than the 13th Finance Commission which had pegged 2010-11 fiscal deficit at 5.7 percent of gross domestic product. Mukherjee committed to keeping it within 5.5 percent, as much as 1.2 percentage point less than the current year’s level. In the process, he rolled back many of the economic stimulus measures given in the last budget on the grounds that the economy has now recovered.
But the big surprise came in his borrowing programme. Mukherjee delighted the stock markets by saying he would borrow only Rs.345,000 crore in 2010-11, as against Rs.400,000 crore in the current year. Lower government borrowings mean availability of credit to the private sector and lower interest rates. The euphoria reflected in the way key market indices broke out of their immediate resistance levels.
Pranab Mukherjee thus pulled off an impossible task. He has launched the most decisive attempt at tackling the fiscal deficit in recent years, but managed to do it without anyone feeling the pain. Some of the impact will be felt when the housewife sits down to make up the budget, but that’s for another day.
While Pranab Mukherjee put government finances back on track to meeting medium-term targets, he didn’t just stop at balancing the receipts and disbursements. “The Union Budget cannot be a mere statement of Government accounts. It has to reflect the Government's vision and signal the policies to come in future,” he said during this speech.
Within the requirement to keep official spending in check, Mukherjee has tried to launch comprehensive action in select areas. Agriculture is one of them. M.S. Swaminathan, the agricultural scientist behind the Green Revolution, says this is first time that a budget has adopted an overall, integrated approach to agriculture making provisions for cultivation, post-harvest technology, commerce, credit flow and conservation. It has also made a small beginning to support women farmers, another path-breaking initiative.
The budget also revealed what is in the minds of the policymakers at the highest level to take economic reforms forward. Mukherjee said new banking licences will be issued to the private sector, including to eligible non-banking finance companies. He also made a commitment to open up the retail sector, a move that industry insiders interpreted as being the entry of foreign direct investment within two years. “This is a radical budget in some ways. There are some big measures that are explicit, but quite a few that are implicit,” says Abheek Barua, chief economist at HDFC Bank. “You can’t be too explicit when you are making radical changes.”
In a first for policymaking, Pranab Mukherjee has used the budget as a tool to encourage the spread of clean energy initiatives. A National Clean Energy Fund will be formed, capitalised by a cess on coal use, based on the “Polluter Pays” principle. On the other hand, he has given tax sops to the solar panels segment and increased the allocation for non-renewable energy by 61 percent.
Given that Mukherjee was making this budget in a year largely free of political compulsions, he had a rare opportunity to nudge the reforms programme along. He took up that opportunities in some sectors, but the one area where he stopped short of biting the bullet was the administered pricing mechanism in the petroleum sector. The price hike for petrol and diesel, beside the duties on crude and petro-products, will make fuel dearer for the consumers but in no way attacks what is clearly an unviable system of pricing. That will happen only when the government seeks to achieve a transparent link between global crude prices and domestic fuel prices. In an interview to Raghav Bahl, Network18 group editor, Mukherjee admitted that the lack of consensus among coalition partners stopped him from launching some of the reform measures.
In his various decisions, Pranab Mukherjee remained true to his core objective of fiscal discipline. This is evident the most in the way he has sought to curtail the primary deficit (fiscal deficit minus interest payments) which discounts the legacy of past profligacy and truly reflects current spending levels. He cut it down to 1.9 percent of GDP from 3.2 percent last year, in a rather tough scaling back of government spending. This indicates that fiscal indiscipline of the past costs the government as much as 3.6 percent of GDP today.
Let’s face it. We need Pranab Mukherjee’s magic to get out of this hell hole.
(Additional reporting by Cuckoo Paul, Saumya Roy, Malini Goyal, N.S. Ramnath and K.P. Narayana Kumar)
