Good for all budget

union budgetDespite the global meltdown and negative local weather, Pranab Mukherjhee had presented a positive budget. The sily market which is very selfish had reacted badly by shedding over 800 points. But who cares about it? After all 80% of the Indians don’t know about the stock market. The private sector naturally unhappy with the budget which gave priority to the aam admi should learn to live with the mass situation. It is high time they drop the useless ideas of over leverage to the corporate and undervaluing the public enterprises. At no point of time profit making PSUs should be privatised.

The Hindu editorial writes (8 July 2009)

The United Progressive Alliance government counts among its successes the high growth rate of 8.5 per cent registered during the last five years and its programmes such as the National Rural Employment Guarantee Scheme (NREGS) that sought to make that growth inclusive. The budget presented by Finance Minister Pranab Mukherjee focusses sharply on one part of the success story, that is, inclusive growth, even as its efforts to restore the economy to the path of high growth h ave not been so robust. The big idea that emerges out of this budget is the Food Security Act to which there is now an express commitment of a time frame for implementation. That measure would guarantee as a right to every family below the poverty line the supply of 25 kilograms of rice or wheat at Rs. 3 a kg. Who exactly will be eligible, when it will be rolled out, and whether it will be started on a smaller scale before it is extended to the whole country much in the manner of the NREGS remain unclear. Unlike the NREGS, which has a works component built into it, the food security scheme would be a pure income transfer programme; it is bound to have an even more direct and dramatic impact on poverty. The experience of States that have launched subsidised foodgrains programmes – at Rs. 2 a kg – shows that it would be politically rewarding as well. Prime Minister Manmohan Singh has indicated that finding the resources for such a programme going by the conservative estimates of the below-the-poverty-line population adopted by the Planning Commission would be within the realm of practical politics, although a larger programme based on higher poverty estimates may pose problems of funding.

The focus on inclusiveness continues through the increased allocations for the flagship programmes, with the NREGS getting a 144 per cent increase to a total of Rs. 39,100 crore. A total of 44.7 million households are expected to be covered this year as against 33.9 million last year and the scheme is to be brought into convergence with other rural schemes such as water and forestry projects to ensure that tangible assets are created through work under the NREGS and the rural infrastructure strengthened. The Bharat Nirman programme and the National Health Mission are also to get substantially higher allocations. Also commendable are the plans to increase credit availability in the rural areas, assistance for women’s self-help groups, and the commitment to provide social security to sections in the unorganised sector. The extension of the Integrated Child Development Services to cover all children under six is a measure that was overdue. An attempt has been made to take advantage of the changing demographic profile with the continuing increase in the working age population through the emphasis on skills development programmes.

Where the budget falls short is in the area of stimulating growth. The increased expenditure of Rs. 61,000 crore over the interim budget should overall serve as a substantial stimulus. Not much need be made of the reaction of the stock markets that had gambled on some parts of their wish list coming through and were disappointed. Yet there is nothing in the budget that is particularly significant or dramatic enough to change the mood of uncertainty and pessimism that has gripped business and industry. The Finance Minister was not inclined to reduce the corporate income tax rate on top of the plethora of exemptions that result in lost revenue but the corporate sector did get some relief through the abolition of the fringe benefit tax. This tax was meant to discourage the loading of personal benefits on to companies as business expenses but was regarded as too burdensome in terms of record-keeping and compliance. Also, the sharp cuts in excise duties effected at the beginning of the slowdown have not been reversed. In customs duties, the goal that has been set by the government is to take the peak import duty rate close to the levels prevailing in the ASEAN countries. Yet at a time when industry has been hit by the downturn, a measure of protection was considered necessary and the Finance Minister did not move towards that goal. The increase in the personal income tax exemption limit by Rs. 10,000 is no more than a token gesture to the middle class, although Mr. Mukherjee did not really have headroom to give away much more. Even more significant than the rates is the Finance Minister’s promise to simplify the tax code and make tax collection procedures less burdensome. While the budget may be short on measures that have an impact on business sentiment, the increased outlays on infrastructure, particularly agricultural and rural infrastructure, will strengthen the foundations for long-term growth.

The Finance Minister has made a huge gamble in moving so far from the Fiscal Responsibility and Budget Management Act targets and leaving a fiscal deficit of 6.8 per cent of the gross domestic product. Add to this the off-budget items and the deficits of the States, the combined total fiscal deficit may well exceed 12 per cent of GDP. Excess capacity in many industries does provide a cushion against an immediate spurt in inflation but after a period when the slack is taken up, the build up of liquidity is bound to have its impact on prices. Further, as the excess of expenditure over income is to be funded almost wholly through government borrowing, there will be a hardening of interest rates at a time when a lowering is called for. Mr. Mukherjee has promised a return to the process of fiscal consolidation at the earliest, but he will have to reckon with several imponderables, among them the recommendations of the Finance Commission that will have a deep impact on central finances. The widening deficit certainly poses a major risk but it is a risk taken in pursuit of the broader objective of inclusive growth and may well be politically justifiable.

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