Union Budget
Run with the hare and hunt with the hounds

The Union Budget 2011 was placed before the parliament by Pranab Mukherjee, Finance Minister of India on 28 February, 2011 amidst much speculation. The hue and cry about inflation, although quite justified, shifted focus from the basic fundamental state of our economy.

The best precursor to any budget is the economic survey published by the government that gives the true picture of a nation’s economy. The Economic Survey 2011 brought forward some very important facts in the form of hard statistics. Industrial output grew by 8.6%, with manufacturing at 9.1%, despite the slowdown. The agricultural sector too, witnessed robust growth. Export figures rose by 29% between April and December while import figures rose by 19%. The overall trade gap was lowered by US$82.01 billion over the period. Foreign Exchange Reserves were at a comfortable $297.3 billion. With the fiscal deficit coming down to 4.8% of GDP (from 6.3% in the previous year), these figures collectively show that the government had better breathing space, as far as its finances were concerned. The survey clearly stated the immediate concerns that need to be addressed this year.

Agricultural sector will need some serious intervention to prevent high-growth-high-inflation trap that it faced last year. Given the high global prices, imports as a policy option are no longer advisable or adoptable. In the current context, there is no two ways about what needs to be done. The only route out seems to be solid fiscal intervention. The survey also stressed on the need for better convergence of schemes related to unemployment and poverty and to avoid duplication and leakages.

Social infrastructure, in the form of education, health etc. was identified as an area that needs a boost, to cope with both economic and political challenges. The infrastructure has been a major bottleneck in the growth process of India for ages. In fact, we could refer to the first plan document in the post independence period as an example; infrastructure development has always been a problem, with demands far exceeding the available resources. With this checklist, let us look at the budget to check how well it fits the need of the hour.

The budget had many announcements pertaining to the agriculture sector. Capitalisation of National Bank for Agriculture and Rural Development (NABARD) of Rs 30 billion, rise in the target of credit flow to agriculture sector to Rs 4.75 trillion along with 3% interest subsidy and special incentives for pulses, palm oil and farm development include some of the good points in this budget. Special focus on warehousing facilities and newer fertiliser policies are other indirect steps taken. To understand the actual impact of newer fertiliser policies, a detailed study will be required. An amount of Rs 400 crore has been allocated to extend the green revolution in eastern regions of India.

A rise in health sector allocation to Rs 267.6 billion and education sector allocation to Rs 520.5 billion, a spew of announcements for rural infrastructure that cover rural housing, an increase in allocation for social projects like the Anganwadi project etc. are some of the steps taken to address the problems of the poor and the marginalised. The food security bill, a major initiative that has been on the drawing board for long, could be implemented this year. Social sector expenditures are to be raised in this year’s budget, and any bit in this section is welcome.

However, a budget has to be strongly balanced; that includes not only balancing accounts, but also demands and aspirations of certain stakeholders. Take for example, the obsession with foreign investments. It was interesting to note the number of Foreign Institutional Investors (FII) mentioned in the budget instead of the more traditional, Foreign Direct Investments (FDI). FDI, as one may recall, was supposed to bring in technology, investments and a boost to the manufacturing and services sector.

FII has always been a riskier option. The global financial crisis has proved that the finance sector is not only highly volatile, but essentially speculative in nature as well. Overall, the risk associated with it is very high, and many countries are still paying the price. However, our Finance Minister continues to have undying faith in them. Thus, FIIs can now invest in the mutual fund market for equity schemes. They can also invest more in corporate bonds issued by companies in infrastructure sector. With a record high foreign exchange reserve, high domestic savings and higher domestic investment figures, the finance minister has decided to use these as an incentive for foreign investors to come and make profits at our expense!

As far as direct income tax is concerned, there were no surprises. A concession of Rs 20000 for tax exemptions announced is in lieu with expectations. Neither were there any changes in rates/slabs for women nor in corporate taxes. That is quite welcome, as tax rebates are no solution for countering inflation. However, the budget intends to raise indirect tax collections, which are usually more distortionary than direct taxes.

While trying to bring in more items under the tax ambit is welcome, what the government could have done instead is reduce customs duties and raise corporate taxes; this move would have had 2 advantages. First, by taxing the company rather than the product, many logistical challenges faced in realising the revenue would be simplified. Excise duty with numerous product codes having different levels of exemptions give rise to complications in categorisation, identification of the taxables, and final collection of the revenue. Second, taxing the companies profit rather than a consumer’s consumption is more egalitarian.

But the most damaging aspect of fiscal conservatism is the notion of cash subsidies to the poor. While this move is being lauded as it will help reduce fiscal deficit, the system itself is a highly risky one. In a country where we do not have proper implementation of BPL identification, how does the government plan to identify the poor and pass on the subsidy? The entire BPL project itself is fraught with corruption, with reports of commodities earmarked for distribution at BPL prices to the poor being sold off in the black market coming from all across the country.

Cash transfers in such a situation will definitely raise the risk of corruption. Frankly, how many of you foresee some poor desolate person going to a government office and claiming cash as subsidy without having to go through complicated red tapism, bureaucratic harassments, greasing a few palms, and/or local level bullies usurping the entire amount?

For a government that is not free of corruption, such a move that institutionalises corruption comes as quite a shock.

Overall, in the process of trying to bring out a well-balanced budget, the Finance Minister tried to offer something to everyone involved. In the process, he sacrificed giving any definite direction to the economy through this budget. The main aim of the budget is crystal clear; the government needs to get this budget passed in parliament for its own political stakes and for that, it seems the Finance Minister is ready to run with the hare and hunt with the hounds.