By Nantoo Banerjee
The Rs. 14.90-trillion crore heavily debt-dependant annual budget for 2012-13 is a road to almost nowhere. From the country’s proverbial Aam Aadmi to the lofty air-conditioned stock exchange tower on Mumbai’sDalal Street, all are confused about the direction of the budget. Stockbrokers, who expected a big-ticket budget, were busy with handling ‘sell’ orders soon after Union Finance Minister Pranab Mukherjee unfolded his proposal to raise additionally Rs. 46,000 crore in the coming year by tinkering with service tax, excise duty and customs levies. The Sensex shed 90 points within minutes. But, speculators in government bonds made a killing soon after the finance minister hinted at a possible 5.1 per cent fiscal deficit — a gross underestimation, according to many – for the year. The Government of India bond yields and overnight indexed swap rose sharply. The 10-year benchmark bond yield rose to 8.42 per cent, up nine basis points from its level before the budget was announced.
The industry is upset on seven accounts. First, there was no effort on the part of the government to compress expenditure which falls far short of revenue income. The understated fiscal deficit even though at a high of 5.1 per cent of GDP, massive market borrowing, providing no room to RBI to lower lending rates soon, continuing high inflation, flat 20 per cent increase in basic excise and customs duties, no specific road map to curtail subsidies and no clear picture of land acquisition for core sector and infrastructure projects are the others. To many, the budget was heavy on words and light in substance. Few believe that even the modest GDP growth projection of 7.6 per cent is not achievable under the given conditions.
Simultaneously, the industry is worried that even the market borrowing target may not be fulfilled. Nearly 80 per cent of the fiscal deficit is to be covered by market borrowing. This is a huge amount considering the fact that the net market borrowing in the current fiscal would be around Rs. 4.75 trillion. The finance minister is banking too heavily on both internal and external borrowing to keep his high expenditure commitments. It is too risky as also undesirable considering the recent experience of many countries around the world, including some of the European Union members. There was no need for taking up the so-called social projects which eat up more money in their administration than bring real value to target beneficiaries.
The underlying mood of the budget is ‘safety first.’ The rest are about petty accounting, fiddling with taxes, giving away a little and taking away some. As a result, the important annual exercise for mobilizing funds for the government expenditure and providing a direction to the economy became more of a confusing mixture of high sounding words, failing to enthuse either the common man or the capitalist citadel, the stock market. For the bottom level individual tax payer, the exemption limit was raised by a meagre Rs. 20,000. While corporate taxes remained unaltered, key indirect taxes – central excise and customs levies – were raised by as much as 20 per cent, from 10 to 12, almost across the board. The service tax too has been raised for all but 17 items. This alone is projected to generate additional revenue of over Rs. 18,000 crore.
Predictably, the immediate stock market reaction was in the negative. It is not that the budget ignored investor interest. Actually, it offered many tax incentives and breaks for new projects. But, they may not be much of an avail for other reasons which deter demand growth and corporate profitability. The fear is not entirely unfounded after a poor showing of the industry and manufacturing sector during this current fiscal registering only four per cent growth. The indirect taxes are expected to mop up additional revenue of over Rs. 45,000 crore. Cornered by growing political opposition to the UPA government, from both the allies and traditional rivals, and being fresh from the memory of Trinamool supremo Mamata Banerjee’s reaction to the small passenger fare hike in the incomplete Railway budget, Finance Minister Pranab Mukherjee had carefully crafted his budget speech and proposals to avoid backlash from known and unknown sources.
There is nothing populist about the budget. It is not reformist either. The reform controversy has been cleverly avoided. For instance, the finance minister’s budget statement left it to the states to consider foreign direct investment (FDI) in retail. On subsidies, Mukherjee merely mentioned about the government’s endeavor to keep them under two per cent of GDP in 2012-13. It sounded as vague as the Rail Budget seeking two paise fare increase per kilometer of long distance journey. He spoke of the subsidy disbursement mode, instead. The only positive growth driver in the budget in the form of a massive investment in mining, power and infrastructure sectors, including national highways, rural arterial connections and ports, did not mention how the targets will be met in view of the current resistance to land acquisition by the government. For infrastructure, mining and power projects, promoters will require land, preferably acquired by the government, for both public and private sector projects.
On the investment front, the budget does not leave much room for individual initiatives. Instead, it depends heavily on public and commercial borrowings – external and internal. From low cost housing to expressways, promoters are allowed external borrowing. The government also allowed tax-free bonds to the tune of Rs. 400 billion to finance infrastructure projects and SMEs. The hidden message of the budget is: the government would prefer consensus to confrontation on development issues. It has even promised to present a white paper on black money to Parliament this year, apparently to silence the Anna Hazare gang. The budget, which is modest on projections and high on hopes, makes it clear that the UPA is not about to invite a mid-term Lok Sabha election by making wrong moves. In the process, the country may suffer another year of low growth and missed opportunity. (IPA Service)