The Hindu Business Line : Deft steering of fiscal ship

Mr P. Chidambaram very modestly admitted he has been a lucky Finance Minister. Under his helm, in the past four years the country has experienced high growth and unprecedented tax revenue buoyancy. Indeed taxes have gone up from 9.4 per cent in 2004 to 12.5 per cent of GDP during a period when the GDP itself rose at almost 9 per cent.

During this period, social sector spending has also increased considerably, with health rising by 89 per cent and education by 162 per cent, All this was achieved within the limits imposed by the fiscal discipline law. So, clearly, this calls for some deft steering of the fiscal ship, and not all of it can be attributed to luck alone.

The context for this year’s Budget was less lucky that the previous ones. The global economy looks wobbly, oil and commodity prices are very high, and the spectre of food inflation looms large. Hence, the Budget has to be anti-inflationary as well as growth inducing.

There were also the imperatives of increasing social-spending components substantially. Furthermore, it was widely expected to provide a big boost to agriculture, given its below-potential performance.

Balancing act

Not surprisingly we got a balancing act. There were multiple objectives and hence multiple measures in the budget. The inflation containment is attempted through an across-the-board cut in excise taxes (from 16 per cent to 14 per cent). The growth impetus is sought to be provided through cut in personal income-taxes.

More money in the hands of the middle-class means more consumption spending. Industry would have preferred a cut in the surcharge in corporate income-tax as well, but that was not to be. Finally, social spending received a big boost with 30 per cent for education and 21 per cent for health.

The accompanying increase in spending for rural employment guarantee, urban renewal, highways and rural housing are all in line with the promises of the national common minimum programme.

Cure for indebtedness

The cure for widespread farm indebtedness is a mega loan waiver introduced in this Budget, even though an expert committee had not recommended it. This is not the first-time that such a measure has been announced, but the size is large — at more than 15 per cent of the total budget. But it does not show up as a component of the fiscal deficit.

The loan waiver, like pay commission obligations, and fertiliser and oil bonds are all pushed to future Budgets.

To that extent the success of meeting the fiscal targets is to be tempered by such an off-Budget burden. Thankfully, the burden of loan waivers is not on bank shareholders but on the general taxpayer.

The waiver perhaps releases bank capital and could be a positive. It is possible that the consumption boost will help maintain the growth momentum, and increased social spending will make that growth more inclusive.

(The author is Chief Economist, Aditya Birla Group)

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