The Hindu Business Line : Union Budget 2009-2010 — No tactics to curb fiscal deficit

The Budget presented by the Finance Minister, Mr Pranab Mukherjee, has left the equity market cold. In fact, the Sensex tanked by 953 points, intra-day. This was perhaps the result of unjustified euphoria generated by the vision presented by the Economic Survey, which seemed to promise bold reforms, including disinvestment and changes in foreign investment policies.

The Finance Minister’s speech, coming as it did after such a flashy economic review, was bound to disappoint because it essentially represents a workman-like effort to push back the economy to a higher growth path within the constraints of the political set-up.

Though there is a hint that disinvestment will be undertaken, it is in a sedate fashion. The Budget did not also resort to any flashy tactics to contain the fiscal deficit. The Finance Minister seems to rely more on the revival of growth in the economy and, as a result, the return of tax revenues to a healthy level.

The Prime Minister, in an interview after the Budget presentation, pointed out that he would wait for the Finance Commission, which will give its report in October 2009, to indicate how to fix the fiscal deficit.

Stress on infrastructure

Quite possibly, the Finance Commission may increase the expenditure commitments of the Centre in view of the usual liberality associated with the Commission’s awards. In any event, the Finance Minister has rightly decided not to tackle the question of fiscal deficit frontally at present, given the requirements of fiscal stimuli in the context of the global slowdown.

The Minister laid a great deal of emphasis on increasing the provisions for rural and urban infrastructure. The strategy seems to be based on increasing the level of rural and urban spending, which should move economic activity in the country to a higher trajectory.

To what extent these expectations will be fulfilled depends a great deal on the turnout of the monsoon. It will also be related to the efficiency of implementation of the various programmes outlined in the Budget.

The Finance Minister has, of course, tinkered a bit with the direct tax structure. One of the important changes he has made is the abolition of the Fringe Benefit Tax. This should be welcomed by the corporate sector.

At the same time, an adverse feature of tax changes could be the rise in Minimum Alternative Tax rate from 10 per cent to 15 per cent. The tax pundits will be busy calculating the effects of these changes on corporate profitability.

One of the significant announcements in the Budget is regarding the introduction of the GST (Goods and Services Tax) by the end of this year. Whether the States are in full readiness to implement this massive change in taxation remains to be seen. Although the State Finance Ministers’ Committee had reportedly arrived at a consensus on the introduction of the GST, dissenting voices have been heard recently about this reform.

It will require all of Mr Mukherjee’s negotiating skills to ensure that the dissenting voices are convinced.

Tolerance of deficit

The last time the Finance Minister, Mr Mukherjee, presented a full Budget, he was not required to present the estimates of fiscal deficit. The numbers he dealt with were more in the nature of a budget gap, which was arrived at after deducting the borrowings as included in the Government’s receipts.

The concept of fiscal deficit has, however, gained prominence, primarily after 1991, when the reform programme commenced. According to this concept, fiscal deficit is measured by the difference between receipts and expenditures, but receipts are not to include any borrowings, either from the RBI or other sources.

The Finance Minister must have noted the desirable change in the deficit burden, which he had to bear in meeting the expectations of tough investors and analysts, who had fixed notions of what a permissible fiscal deficit would be in relation to GDP.

Considering that the economies in the advanced world are playing around with higher fiscal deficits in relation to their GDPs in view of the global meltdown, the Finance Minister must have felt that the level of tolerance of fiscal deficit in India would also be at 6-7 per cent. The market has not, however, responded favourably to this assumption.

To sum up, Mr Pranab Mukherjee has presented a ‘maintenance Budget’, which carries an assurance that the economy is in safe hands. It does not offer any high-falutin’ promises. Whether the implementation of its programmes will be up to expectations, only time can tell!

The markets may again revive if there are signs of recovery in the global economy. The Budget leaves the markets shocked and the common man looking at the sky for signs of rain!

( blfeedback@thehindu.co.in)