Author Articles

A DELIBERATELY NON-DRAMATIC BUDGET

This close to the Budget, it is hard to resist putting down one’s views on it. Great things were expected of this ‘dream team.’ The media, as is their wont, duly hyped the Budget, and expectations were sky high.

Against this measure of public expectation, did the Budget disappoint? I fear the answer is not a resounding “No.” First, let us look at the macro situation. The Economic Survey painted a healthy picture and it is hard not to be optimistic on how the economy is doing. Growth at 6.9%, despite a not-so-good monsoon, inflation largely under control at between 4% and 5% despite the spike in oil and commodity prices, external reserves at over $130 billion and rising. An external balance of payments situation that is not worrisome, healthy growth in both exports and imports, growth in the manufacturing sector picking up steadily, a resurgent investment cycle, and a fiscal deficit that appeared to be hitting the target. All individually good signals of the strength of the economy. Taken collectively, they paint a very robust picture of the Indian economy. The point is, the Indian economy has seldom fired on all cylinders as it has done in the past year or two. Expectations were high, given the quality of the team behind the Budget and the relatively low level of political opposition. Against this backdrop, the finance minister had a great opportunity to do something dramatic, as he has done in the past. Of the two hours of the speech, the minister devoted a good hour and a quarter to development issues for the rural and socio-economic sectors. Spending was hiked in a number of areas, such as education, irrigation, generation of employment, electrification of villages, etc. However, there was little word on how implementation of these schemes would be made more effective than in the leaky past.

As the minister moved on to the industrial and services sectors, he completely side-stepped the issue of FDI, other than a reference to his Chinese counterpart. He did refer to infrastructure development and, happily, urban renewal finds a mention. But the idea of the SPV sounds suspiciously like another one of those we’ll-find-the-funds-somehow approaches, dressed in a fancy abbreviation (remember, last year it was the Inter-Institutional Group to fund infrastructure projects). There was also little discussion of the government’s over-arching strategy of economic reforms and its vision and roadmap for the future.

In my view, the government has taken the view that softly, softly, is a better way of moving forward with sectoral reforms, rather than with a in-your-face approach. The pre-Budget announcement of FDI changes in the retail and construction sectors clearly points to the government wanting to take sector by sector reforms off the public table, working behind the scenes and announcing progress as and when it happens. This is a more prudent strategy, particularly given the nature of the government’s political support. As a result, the Budget disappointed in enunciating a grand vision or strategy for the future.

By the time he came to taxes, the minister had left himself almost no room for anything dramatic. There was some tinkering with marginal tax rates and income slabs for individuals. On the corporate front, there was almost nothing, one way or the other. The minister intends to raise the tax to GDP ratio from 9.8% to 10.6% next year, by broadening the tax base, through tax buoyancy and by raising taxes on existing payers, although one hopes the burden does not end up falling on the latter. The other negative is that as a result of the Twelfth Finance Commission and other spending obligations, the minister chose to give the FRBM a go-by.

• FM side-stepped the issue of FDI, but for a reference to his Chinese counterpart
• Government’s view seems to be to move ‘softly’ on sectoral reforms

So, when one looks back at the public reaction to the Budget, there was a hint of disappointment (maybe more than a hint), in the sevens and eights that were being handed out on the Budget. But the market has reacted with relief at the fact that there was nothing really damaging either, and it was mostly a continuation of the same policies followed by several governments since the early ’90s. So all-in-all, I would call it a workmanlike Budget, possibly not living up to its expectations, particularly given the extremely favourable macro-economic timing and backdrop.

Source: The Financial Express