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A Budget that is sleight all the way

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The Finance Minister was too keen to show that he had done a great job.
The Finance Minister was too keen to show that he had done a great job.
S. Gurumurthy

The Finance Minister could have been transparent. He need not have ornamented this Budget at all. He could well have taken the country into confidence about the economic mess, and asked all sections of the people to endure some hardship to help the nation overcome the crisis.

Pranab “gambles with big stimulus”; “Borrows to fund handouts”; “Rs 1,86,000 crore is the fiscal stimulus in 2008-09”; “A House for Commons”. This is how the media, both print and visual, headlined the Budget for 2009-10. The media once again seem to have been misled by the Finance Minister’s Budget speech. This is despite the fact the almost all the speeches in the past have invariably concealed the real story in the Budgets. This time the media may have been mislead into believing all that Mr Pranab Mukherjee had said because he had begun his Budget speech very differently.

Speech craft

Most Finance Ministers craft their Budget speeches as if their speech and their Budget would decide the fate of the nation’s economy for all time to come. But when almost at the opening of his Budget speech, Pranab Mukherjee said that “a single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so”, he looked totally unlike most of his predecessors.

This had perhaps raised the hope that, in other respects also, his speech and the Budget would be more transparent and less sneaky. But when he ended his speech, it seemed the same old story. And more, when the numbers hidden deep inside hundreds of pages of the volumes were scanned, it became clear that Mr Pranab Mukherjee’s Budget was clearly as sleight as his predecessors’.

Take a core statement of his speech, namely, that the fiscal deficit overrun from 2.7 per cent to 6.2 per cent of GDP in 2008-09 amounted to Rs 1,86,000 crore and that the difference of 3.5 per cent was the “total fiscal stimulus package” in the form of “tax relief to boost demand” and “increased expenditure on public projects” to “counter the fallout of the global slowdown on the Indian economy” [paras 13 and 14 of the budget speech]. This statement is only one-third true; and two-thirds lie. The numbers speak.

Whither stimulus?

By looking at a single sheet in the Revenue Budget [p1] and another sheet [p10 ] in the Expenditure Budget, a first year B.Com student can show that, out of the proclaimed “stimulus” of Rs 1,86,000 crore, over Rs 1,30,000 crore — that is more than two-thirds — consist of fall in income-tax collections [Rs 20,000 crore], Sixth Pay Commission dues [Rs 40,000 crore], fertiliser subsidy [Rs 45,000 crore], food subsidy [Rs 11,000 crore], farm debt waiver [Rs 15,000 crore], and extra interest on borrowings [Rs 2,000 crore].

None of these items is related to the “stimulus”. The fall in income-taxes is due to the meltdown; not to counter it. And the overrun spend in revised estimates for debt waiver, Sixth Pay Commission, and subsidies are mere short-provisioning in the 2008-09 Budget.

The explanations in page 10 of the Expenditure Budget make it clear. Even if the global meltdown had not taken place, these extra expenses would have had to be booked in the Budget. Only the fall in excise and Customs collections of Rs 28,000 crore [Rs 40,445 crore less 30.5 per cent due to the States], and Plan expenses [both capital and revenue] of Rs 40,000 crore — totalling Rs 68,000 crore — could be related as stimulus. But, here too, if the 0.5 per cent negative growth in manufacturing and fall in the growth of imports by half in the later part of 2008-09 are reckoned it may well be fall in revenue due to meltdown rather than the stimulus to counter it. Looking at the current year also, the perception that the Finance Minister has attempted to spend his way through to counter the meltdown is clearly wrong. Out of the extra spend of Rs 1,20,000 crore proposed in the 2009-10 Budget over the previous year, Rs 44,000 crore is again on account of the Sixth Pay Commission dues; Rs 33,000 crore for extra interest; Rs 10,000 crore for non-Plan grants to States; Rs 10,000 crore for contribution to the IMF and loans to PSUs; these add up to Rs 97,000 crore.

It is only because of the fall in fertiliser subsidy and allied items by Rs 29,000 crore, this gross extra spend gets reduced to Rs 78,000 crore. Not a single rupee out of this is stimulus to counter the slowdown. It is only the Plan allocation of Rs 42,000 crore, which includes the extra provision of Rs 25,000 crore for NREGA, that passes off as stimulus.

So much for the Finance Minister’s grandma story on the stimulus impulse in the Budget. Further, behind the Finance Minister’s celebration of the rise in non-tax revenue by a huge figure of Rs 46,000 crore lies concealed the anticipated sum of Rs 35,000 crore from auction of 3G spectrum licence. Why does he not say in his speech that this is what the big rise is about?

The Finance Minister is explicit that this Budget has nothing to do with the reform economics of the Prime Minister and the previous finance minister. He has ruled out financial sector reform so passionately insisted by both of them at every opportunity.

In contrast, he has [in para 38] recalled the nationalisation of banks by the former Prime Minister Indira Gandhi 40 years ago and glorified it as wise and visionary. By saying that banks and insurance will continue to be in the public sector, he has hedged against any effort to undo it.

Contrary to Survey

So at one stroke, the Finance Minister has shredded the Economic Survey which had predicted a gung-ho reform Budget. There is not a word in his speech about the far-reaching financial sector “reforms” the Survey commends at pages 30-32 [boxes 24 and 25], which included the passing of the Banking Regulations Bill; hiking FDI in insurance to 49 per cent; permitting 100 per cent FDI in select insurance companies; allowing FDI in retail, defence industries, and so on. This Budget has virtually outcast the Economic Survey, making it explicit that the Survey had nothing to do with the Budget exercise. Yet, the Survey had vetted the appetite of the stock market. And the Budget has ended the party for the market. The result: The market is down by some 1,000 points since the Budget was unveiled.

See how the market reacted. When the Finance Minister touched upon his measures for the weaker sections, the Sensex was down by 137 points; by the time he had completed the social sector exposition, it was down by 245 points; when he spoke of tax reform and tax code, it had slid by 340 points; when he announced the surcharge cut it was down by 420 points; when he announced the abolition of FBT, it recovered 50 points; when the hike in MAT was announced it was down by 400 plus; by the time he completed the direct taxes exposition, it was down by almost 500 points; when he ended the indirect tax proposals, the fall was over 700 points; when he ended the speech the fall topped 750 points.

This proves that the stock market in India is a trader’s, and not an investor’s market. The traders react only to what they get directly. This Budget gives them nothing directly contrary to what the Economic Survey had indicated.

Raising expectations

QED: Yet, given the unenviable state of the national economy and the crisis in the global markets, the Finance Minister has not done a bad job. His mistake was that he was too keen to show that he had done a great job. That did him in.

Great expectations were created which the Budget could not fulfil. The Finance Minister could have been transparent. He need not have ornamented this Budget at all. As a leader who has declared that this is his last term in Parliament, he could well have taken the country into confidence about the economic mess; and asked all sections of the people to endure some hardship to help the nation overcome the crisis. But that calls for a different leadership which no party in the country seems to possess.

(The author is a corporate adviser. comment@gurumurthy.net and blfeedback@thehindu.co.in)

Related Stories:
Pranab borrows big to fund handouts
Congress borrows, spends, wins - at our expense
What triggered the sell-off
Market spooked

(This article was published in the Business Line print edition dated July 9, 2009)
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