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Monday, March 19, 2012

Union Budget – 2012-13: Of Good Intentions

Here is a seasoned politician, Mr. Pranab Mukherjee. And he is our Finance Minister (FM). Obviously he knows how to steer his way through the maze of the political uncertainty that has encased the Parliament—for that matter, why Parliament, the nation itself. What else can explain his guts in advising the Parliament through the document—Economic Survey for the year 2011-12 presented to the Parliament on March 15, 2012—that “coalition politics and federal considerations played their role in holding up economic reforms on several fronts, ranging from diesel and LPG pricing to FDI in retail” and that the economic slowdown is more due to “pressures of democratic politics.”

Having thus created the right ‘atmospherics’ for his budget presentation, Pranab Mukherjee  has gone ahead with his mission: “I have made a determined attempt to come back to the path of fiscal consolidation in the budget for 2012-13 by pegging the fiscal deficit at Rs 5,13,590 crore, which is 5.1% of GDP”, by hiking excise duty across the board by 2% to collect an additional amount of Rs 27,280 crore and widening the service tax net to cover all services, except 17 categories in a “negative list”, to collect an additional amount of Rs 18,650 crore, in the process, inviting no wild reaction from any quarter for his Budget 2012-13 which he presented to the Parliament on March 16, 2012. Additionally, he has budgeted Rs 60,000 from spectrum auction and Rs 30,000 by way of disinvestment of state-owned companies (as against the current year’s achievement of Rs 14,000 crore), besides capping the outgo on subsidies to 2% of GDP to ensure that the targeted fiscal deficit remains at 5.1% of GDP. 

So far as the intentions are concerned, the budget sounds alright. But the big question is: Can the FM retain the outgo under subsidies at 2% of GDP? A peep into the provisions made under the head subsidies in the current budget does not encourage one to back Finance Minister’s expectations. For instance, the provision towards petroleum subsidy is Rs 43,580 crore against the revised estimate (RE) of Rs 68,481 crore for the fiscal 2012, while the international crude prices are already up $110 per barrel with no likelihood of its fall in the near future. Similarly, the provision against food subsidy, which stood at Rs 75,000 as against the RE of Rs 72,823 for the fiscal 2012, may not be sufficient, particularly in the light of the UPA government’s ambitious programme under the proposed food security bill. Same is the case with fertilizer subsidy, for the budget provision has been pulled down from the RE of 2011-12, Rs 67,199 crore to Rs 60,974 crore, while the international prices of urea are increasing. That aside, the overall demand for urea is increasing across the country, which indeed is set to rise further with the proposed increase in the bank’s lending to agriculture.  

So, what all this means? The answer is simple: the decline in the budget provision for subsidies from Rs 2,08,503 as in the RE of 2011-12 to Rs 1,79,554 crore for 2012-13 is sure to turn out as under-provision, unless the government, as the PM said in his post-budget address to the press, is willing to “bite the bullet” to reduce the subsidies. As the Prime Minister rightly said, “There is no other way in which you can reduce subsidies.” Still, what remains to be answered is: Does the government have the gumption to act in the right direction, particularly with coalition partners like Mamata Banerjee around? 

The other objective that the FM pursued through the budget is: accelerating economic growth. To give a boost to investment in infrastructure projects, he has allowed issuing tax-free bonds of Rs 10, 000 crore by NHAI, Rs 10,000 crore by IRFC, Rs 10,000 crore by IIFCL, Rs 5,000 crore by HUDCO, Rs 5,000 crore by National Housing Bank, Rs 5,000 crore by SIDBI, Rs 5,000 crore by ports, and Rs 10,000 by power sector. To encourage public-private partnerships in road construction projects, he has allowed external commercial borrowings (ECB) for capital expenditure on the maintenance and operations of toll systems for roads and highways, so long as they are a part of the original project. He has allowed ECB to part-finance rupee debt of existing power projects. To ease the financial crisis in aviation industry, he has allowed ECB for working capital requirements for a period of one year, subject to a total ceiling of $1 billion. The current budget allows ECB in low-cost housing too. Incidentally such inflow of forex is also hoped to ease the market volatility of rupee.

Amidst these good intentions, the real provisions in the budget that can give a boost to domestic production are: allocation under Rural Infrastructure Development Fund has been increased to Rs 20,000, with an exclusive allocation of Rs 5,000 crore for creating warehousing facilities; and capital expenditure has been increased by about 30% to Rs 48,000 crore. Of course, a greater chunk of it goes for defense and other obligations towards IMF, meaning little for boosting domestic demand. There is thus little in the budget that can fuel growth.

On the other hand, revenue expenditure is rising by about 11%. This, coupled with the rise in the government borrowing from Rs 5 lakh crore last year to Rs 5.6 lakh crore for fiscal 2013, which the government intends to raise from the bond market, is certain to harden interest rates. Nor can the Reserve Bank of India do anything under these conditions to moderate interest rates. Should this happen, private investment, including investment under infra projects, will get hit. Obviously, this is sure to derail the anticipated growth of 7.6%. This in turn derails the budget—to be precise, all its good intentions. 

That said, we must give due credit to the FM for his focus on getting the finances back on the rails by raising the scope for increased tax collections and, particularly, his desire to cap the subsidies at 2% of the GDP. Let us hope that the optimist in him will finally succeed, for he is sure that “Nobody wants mid-term polls.”

GRK Murty


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