Pranab's Budget: A Bridge to Recovery

It is not Basic Instinct. It is not the Gettysburg Address. It is neither sexy nor momentous. But if you had expected a simple budget that would ease the pain of global recession, spur economic activity in villages, create jobs and put more money in people’s hands, Finance Minister Pranab Mukherjee delivered today.

In his first full-fledged budget in 25 years, Pranab Da has only picked up from where he left in his 1984 budget. He has shown again that he likes to tax less, not more. This budget also marks a departure for the United Progressive Alliance (UPA) government from Chidambaranomics, that school of thought that hunts for new ways of taxing.

Mukherjee came into this budget in the backdrop of the worst global economic turmoil in living history. India’s economy is slowing down. The export-led economic model is crumbling, while domestic consumption is listless. Rural India, which can act as a counterweight to all this, has lagged behind the cities in recent years. There is a need to stem job losses, encourage the movement of money through higher consumption and spending on infrastructure.

He has taken a daring call to do all this by exposing the government to a higher fiscal deficit at 6.8 percent in the current fiscal year. This means the government will borrow more and its interest payments will rise. He has clearly sent out the message that this is not the time to move towards balanced budgets, but fund the recovery. A deficit is good or bad depending on the context; the current context is a cold engine that needs to be kickstarted.

The finance minister, however, has moved cautiously on where this extra money gets spent. Doubtless, higher government salaries take out a chunk and Mukherjee can’t do a thing about it. But he has also focussed on plan expenditure, the sort of money that goes into development projects. He has raised plan expenditure by Rs.40,000 crore from the level he had announced in his interim budget just four months ago. He has also allowed states to borrow more by relaxing the fiscal responsibility norms. All this will result in the infusion of Rs. 61,000 crore for project spending.

Where Mukherjee fails, perhaps, is in not articulating a clear strategy to get back on the track of fiscal discipline after this temporary extra spending. This, coupled with his silence on rationalising the burden of various subsidies, could send a signal that the government has given up its fight against wasteful expenditure.

Mukherjee has taken a series of measures to ease the pain of those suffering from the slowdown. He has extended the tax holiday for exporters by a year, removed the burden of service tax on some export-led activity and increased the flow of credit to micro, small and medium enterprises.

He has stepped up the provision for agricultural credit to Rs. 3.25 lakh crore and the allocations for three rural infrastructure schemes between 27 percent and 59 percent. He has also extended the deadline for loan repayment by bigger farmers and begun looking into the glitches of the Rs. 71,000 crore loan waiver completed last year.

A bigger change comes in the National Rural Employment Guarantee Scheme (NREGS), India’s largest social safety net and job creation effort. Under this, one member of each rural family is guaranteed 100 days of employment. This also helps the government build rural infrastructure using local labour.

Mukherjee has given a 144 percent increase in allocation for NREGS at Rs.39,100 crore. He is also merging various similar plans under the banner of NREGS to make it more effective.
On the subject of jobs, just think how the way employment exchanges are run in this country can change with his proposal to bring in private players.

A Man of Two Worlds
Mukherjee first worked under Indira Gandhi during the country’s worst social, political and economic crises in the 1970s and early 1980s. But he seemed to have a sense of the future because he cut income tax rates across the board by 5 percent in his 1984 budget. With Manmohan Singh as the governor of Reserve Bank of India, he had indeed shown a zeal for economic transformation.

Today, he continued that agenda by abolishing the irritant Fringe Benefit Tax (FBT) and the still-born Commodities Transaction Tax (CTT), both introduced by the tax-hungry Palaniappan Chidambaram. These are far-reaching moves in eliminating both the burden and annoyance that these taxes brought to companies and individuals.

If you are a salaried individual, the good news doesn’t stop there. The increase in the income tax exemption limit, though a marginal one, and the elimination of surcharge should account for a substantial saving. Mukherjee is telling you to spend more.

Twelve years ago, Chidambaram spread the net for companies using exemptions and not paying any tax, by launching the Minimum Alternate Tax (MAT). Perhaps in a tribute to him, Mukhejee raised it to 15 percent from 10 percent earlier. Now, look at the script: More money with individuals, less money with rich, tax-saving companies. Isn’t it clear where the complaints are coming from?

As Mukherjee spoke, the stock market started falling, apparently in the absence of big-bang announcements. To make matters worse, he made a very direct statement that he is not changing the corporate tax rates. But in reality, the capital market has something to cheer too. He is raising the threshold for public shareholding in all listed companies, private or state-run. This should result in share issues that otherwise would not have happened. Also, Mukherjee indicated that he will disinvest in public sector units through public issues. “The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 percent government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme,” he said.

Admittedly, he did not announce the list of companies he plans to disinvest or grand infrastructure projects. Neither did he spell out a clear disinvestment strategy beyond these nebulous words.
But there are subtler changes that must bring about positive impact. For instance, he has given India Infrastructure Finance Co. a lot more flexibility and the responsibility to refinance commercial banks on loans to public-private projects.

Together, the institution and the banks should be able to finance as much as Rs. 100,000 crore for infrastructure. Mukherjee has also raised allocation for urban renewal and highway construction, handsomely over the levels in the interim budget. But he disappointed those expecting specific measures to bring in foreign capital for infrastructure building.

As for energy security, Mukherjee has made the first steps to change India from an oil-based society to a gas-based one. He has announced a national gas grid which, when it happens, should make gas freely available across the country. A tax holiday for natural gas projects would add fizz to the sector. The one opportunity he missed here is to announce a firm plan to shift to market-determined pricing of fuel. He merely announced another committee, something that has been done before without results.

The budget is peppered with several announcements that should endear him to the people. He plans to guarantee the supply of 25 kilos of rice or wheet at Rs. 3 a kg for all families.

He is taking Rs. 2,000 crore from the shortfall in priority sector lending by banks and giving it for rural housing. He plans to extend healthcare insurance for all poor families.

And to ensure the schemes reach the poor, he also plans to give each Indian a national identity card. This is a break from the policy of the National Democratic Alliance (NDA) government, which wanted to issue such cards only to identify illegal immigrants.

Mukherjee speaks an earthy form of English, isn’t suave or camera-friendly. He doesn’t smooth-talk his budget. Since these are key qualities to be considered having presented a good budget, Mukherjee is likely to face some flak. But a proper understanding of the context and the bigger picture of what he is trying to do will open our eyes to one fact: This budget can be the bridge to lasting recovery.
If it is not Basic Instinct, it is probably One Flew Over the Cuckoo’s Nest. Slow moving, but impactful.

(With additional inputs from Cuckoo Paul)

 

A Must Read: An Exlcusive Interview of Pranab Mukherjee with Network 18