The Hindu Business Line : Union budget for 2008-09

The bailout for farmers on the scale the Budget proposes is a burden on the banks and on the fisc. The Budget, however, is well designed to maintain the growth momentum, says S. VENKITARAMANAN.

The Union Budget for 2008-09 has not set the market on fire. It is as well that there was not much expectation from the Finance Minister, Mr P. Chidambaram, considering this is a pre-poll Budget and he is under enormous compulsions to meet the various populist demands of the members of the UPA.

Further, given the tough conditions in the international financial markets and the upward movement of crude oil prices, Mr Chidambaram had a difficult task to manage both inflation and growth in the light of pre-poll expectations.

The first impression is that he has yielded too much on the side of generosity by conceding debt relief on the scale he has done for farmers. It was not clear from his speech whether this was on the lines recommended by the Radhakrishnan Panel.

It is perhaps Mr Chidambaram’s own judgment, aided by the perceptions of his party colleagues, that has led to this massive debt relief. While, on principle, there may be a case for giving relief to farmers in distress on account of seasonal conditions, a bail-out operation on this scale is ultimately a burden on the banks and finally on the fisc. It also exposes Government to the moral hazard that those who have been complying with their obligation by paying their dues in time do not get relief, but those farmers who have defaulted get the benefit. Bail-outs, however well-intentioned, surely give rise to a culture of further defaults and would increase the reluctance of banks to lend to agriculture. But the compulsions of poll politics are strong, as could be seen from the aggressive reactions of the members of the House when Mr Chidambaram was making the announcement.

Momentum maintained

The Budget, as a whole, is, however, designed to maintain the momentum of growth. It has adequate provisions for helping both industry and agriculture. While on the subject of incentives, one must be thankful for the fact that the Finance Minister has recognised the need for relief for industries affected by the appreciation of the rupee. He also referred to the possibility of giving further relief for those affected.

Insofar as the manufacturing sector is concerned, some of the indirect tax concessions may help. But they are not significant enough in magnitude to offset the drag that may result from the recession likely in the US economy. I am sure the Finance Minister will respond to the crisis as and when it develops.

Rising rupee

The Finance Minister has made a reference to the fact that the Market Stabilisation Scheme (MSS) in itself is a contribution to help keep the exchange rate of the rupee down and the effect should be counted on as part of the Government’s response to the cry of the export industry against a rising rupee.

The fact, however, remains that this argument will not convince the importers abroad who are more concerned about the price they are asked to pay. The Finance Minister is missing the wood for the trees when he asks the industry to be consoled by the large outlays of the Government on the MSS and its effect in depressing the rupee.

Tax changes

Mr Chidambaram’s relaxation of exemption limits on personal income-tax will leave a little more money in the hands of individuals. Similarly, his tax incentive towards establishment of hospitals and hotels in Tier-II cities is welcome. The changes proposed by him in regard to the dividend distribution tax recognise the legitimate grievances of corporates, which often have many tiers of subsidiaries and suffer double disadvantages.

While the Finance Minister’s tinkering with short-term capital-gains tax may be well-intentioned, it may have a negative impact on the equity market. To the extent that FIIs are already exempt from taxes on capital gains because of their location in Mauritius, this may not have much of an impact on FIIs.

Stress on outcomes

The emphasis in the Budget speech on outcomes instead of outlays is a welcome feature. This repeats the emphasis which Mr Chidambaram has made on the ‘outcome Budget’ in earlier years. Hopefully, the Budget will be implemented in the spirit with which it has been framed.

The schemes the Budget has outlined in respect of health, education and welfare are well-designed, but the responsibility for their effective implementation lies with the States.

The Finance Minister has suggested a new mechanism for institutionalising the monitoring of these schemes. I hope this works out better than the routine audit by the Comptroller and Auditor General and his assistants.

Turning to fiscal consolidation, the Finance Minister has tried to keep up to the targets on fiscal deficit reduction and bringing down revenue deficit. Considering the robust tax revenues, he could have considered a better allocation of funds to infrastructure. Maybe, this will come about during the course of the year.

As a whole, the Budget is a well-designed effort to keep economy on the growth path as well as the people on the side of the UPA.