Budget 2010: The inside story
A deeper analysis of the budget that looks beyond the political reasons of inflation

Budget 2010, announced recently by the finance minister is a wonderful example of how the government prioritizes its priorities in the era of globalization. This year’s budget is a classic example of contending interests, and indicates a clear emergence of who is the boss. It also highlights how skewed the government can be even in the garb of democracy.

Since the financial crisis, the world has been ranting about how India and China are going to be the ‘future’? Chindia, a term coined in the process, is supposed to drive global growth; Be it the focus of all future global economic activities, terms like ‘superpower’, ‘global hub’ or coining countries with and ‘engine of growth’ are all thrown in to make it all appear more attractive. With global stakeholders focussing India too much, the finance minister was forced to live up to all such expectations. Incentives to the corporate sector were a precursor for the sustenance of such interests. FDIs and FIIs were at stake, endangering the interests of those who benefit from such investments, like the stock market, business houses etc.

On the other hand, the ministers had certain domestic concerns also to deal with. Growth had staggered in the wake of the crisis, but somehow the economy had managed not to fall flat on its face. It was standing on wobbly feet, with unprecedented inflation rates and suspected export market potentials were tugging it down. In the wake of a fledging western export market, it was suggested by many economists that countries like China and India should explore towards their huge domestic markets as the source of demand to fuel their growth momentum. But to do that, the first priority should certainly have to be the agricultural sector. But because of the drought last year and the grave mismanagement of the situation by the Agricultural ministry, the country is already facing massive food price inflation. Although some of it is based on speculative activities by private hoarders, yet much of it is due to shortfall in overall productions. Kharif food production was 98.3 Lakh tonnes against the expected 125.15 lakh tonnes expected by the Economic Survey 2010. Unless the issue of food sustainability is addressed, any rise in overall demand would essentially trigger higher food prices stoking further inflation. As it is by now clear that the rise in food prices is not because farmers as evident from the differences in wholesale prices and consumer prices. Instead the farmers who produce these foods have actually faced losses in many areas due to the drought. It was quite essential to provide immediate relief to them, so that this year’s productions are not affected. Investing in the rural sector would not only address the problem of inflation, but also would generate massive growth. As any undergraduate student of economics can tell you, since the Marginal Propensity to Consume (MCP) of the lower income Group is higher, the Keynesian multiplier would definitely be higher. What we have in the budget, is a complete surrender to the former interests, at the cost of the latter. Some basic contradictions in the budget in clue.

The FRBM Act which pegs Government’s fiscal deficit limit it has been cited time and again by the finance ministers whenever the issue of public spending on welfare projects is raised. In the wake of the financial crisis, all such concerns were dropped in an instant as the government rushed to provide a stimulus package last year. I for one did not subscribe to the FRBM Act and am more than happy with stimulus packages. But what the Finance Minister has done this time in the name of balancing defies all logic completely. On one hand we have loss of direct tax revenues (stemming from concessions in income and corporate tax) of Rs 26,000 crores. That is supposedly necessary to maintain growth. However, he suddenly remembers he has to control deficit and thus has announced a food subsidy decrease of Rs 424 crores, a decrease in fertilizer subsidy by Rs 3000 crores, and rise in fuel prices of 6% for petrol and 7.75% for diesel. Collectively, indirect taxes are poised to rise by Rs 60,000 crores, which more than compensates for the fall in direct tax income. Did he completely forgot that Indirect taxes are more regressive, as the burden falls on the lower income groups through rise in prices, triggering further inflation. In a situation where we are already burdened with record inflation, we could have done well without such steps even.

In the whole range of income tax concessions, the skewing is more evident. Relief rate rises with rise in income level with no relief for the bottom half at all! The Finance minister said that the income tax relief will benefit 60% of the population, but chose to ignore mentioning which half of the spectrum.

The other big announcement is disinvestment of PSUs. When the UPA first came to power, it ceremoniously scrapped the ministry of Disinvestment setup by the previous NDA regime. Now suddenly we are back to it. It is argued that it will allow the people to own and control PSUs. Now, this may instigate a big query how transferring ownership from the ‘Public’ sector to the “Private’ sector allows the ‘Public’ to own and control them? Can this be inferred as the Government run PSUs were not If the Gov. is being run by the public how come the PSUs are not?

This budget is going to trigger growth with massive inflation. “Growth’ undoubtedly is necessary for global interests to remain interested in India. But high nominal growth rates are eroded by high inflation rates, so much that real growth rates falter. Nominal high growth figures serve the purpose of foreign investors, who invest in our country and then expatriate the profits in such away that the domestic inflation rate does not affect their earnings. For the unfortunate few entrepreneurs stranded within Indian boundaries, there are the tax cuts and sops to ease the inflationary burdens. To woo all such investors, the government is offering a plethora of Private Public Partnerships, chances to own government assets (by dis investing PSUs), issuing more licenses to Non Banking Financial institutions etc. The budget is a clear invitation to domestic and global corporate to profit from the ‘growth’ in India. Everyone os eyeing India its spectators for sure as the next global hub, and the nation will not disappoint.

However, such growth comes at a very high price, and the common population of the country has to pay for it. And, in Budget 2010, majority of the population will have to inevitably bear the burden of global aspirations of a handful of people. So what if rising prices squeeze our savings of a common man to fuel profits? So what if the benefits of direct tax cuts accrue to the rich, while the burden for the same has to be shared by the poor through indirect taxes? We are poised to become a ‘global economic superpower’, and as Spider man says, ‘With great power comes greater responsibilities”.

So, let's have a great journey ahead!