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Confused, Worried and Hopeful

Omkar Goswami

Remember the game that little girls played? “He loves me, he loves me not, he loves me...”. I found myself doing a similar thing while trying to understand Mr. Pranab Mukherjee’s Budget: “He’s done well, he hasn’t, no he has, but he hasn’t...”. At the end of it, my views are best expressed in three words: “confused”, “worried” and “hopeful”.

I am confused because I haven’t got an overall sense of this Budget. This is the first Budget of a new government that does not have to live with the idiosyncrasies and obduracy of the Left for its sheer survival. While this need not require making grand reform promises akin to Eugene Delacroix’ Liberty Leading the People, it is fair to expect clear statements of intent about the direction of economic and fiscal reforms. Yes, the Finance Minister inserted clever caveat in the sixth paragraph of his speech by saying, “Members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.” Even so, I expected more specifics on the direction of reforms.

Such as saying, “I propose to return to the targets set by the FRBM Act from the next year, and hope to eliminate revenue deficits by 2012-13, and keep the centre’s fiscal deficit to no more than 2.5 per cent of GDP” instead of making an open-ended statement like “I intend to return to the FRMB target for the fiscal deficit at the earliest.” Equally, I was looking forward to clearer statements of intent, such as: “In a country where well over a fifth of the population live under the poverty line, inclusive growth requires large and sustained public expenditure programmes. But they also need to be funded — not by large, persistent and unsustainable fiscal deficits, but through growing tax and non-tax revenues.” That would have created a wonderful platform for outlining the broad contours of fiscal reforms and disinvestment.

It is not as if Mukherjee didn’t touch upon reforms. He did so with a feather touch — almost tangentially as it were. Rationalising urea subsidies is couched as the need to “move towards a nutrient based subsidy regime instead of the current product pricing regime”. Dismantling administered pricing of petroleum products is stated as setting up “an expert group to advise on a viable and sustainable system of pricing of petroleum products”. Disinvestment is positioned in terms encouraging “people’s participation” in public sector companies. Nothing was said about increasing foreign investment limits in insurance to 49 per cent, or further reforms of pension and financial systems. Indeed, the only instance of a clear deadline was his intent to release a Direct Tax Code for discussion within 45 days, and introduce a Direct Tax Code Bill in the winter session of Parliament — which suggests that he wants to clean up the surfeit of tax exemptions.

What then should one think of Mukherjee’s reform intent? A canny operator who will undertake most reforms under his bailiwick, but doesn’t want to make too much of it in this, his first Budget? A person who likes to operate under the radar, build consensus, and then strike at the right time? Or one who is not yet sure of the political grounds on which his party stands on — and thus the rectitude? Hence my confusion.

I’m worried about the size of the centre’s fiscal deficit for 2009-10, which is estimated Rs.400,996 crore. That’s 23 per cent higher than the bloated revised deficit for 2008-09, and is 6.8 per cent of India’s expected nominal GDP. Mukherjee has also given the states permission to borrow up to 4 per cent of GDP. Thus, we are looking at a combined deficit of 10.8 per cent. Add another 0.5 per cent on off-budget items, and the number is 11.3 per cent. That’s large, coming as it does after 2008-09.

Eventually, the deficit ratio may be less because of higher growth. But that’s an assumption — one which Mukherjee calls his “calculated risk”. I am also concerned about the nature of this deficit. Much of it is government consumption, which tends to be addictive. It is never a good idea to allow diabetics to dip their hands in candy jars.

I am hopeful because Mukherjee is a pragmatic man. He knows that his government has to divest shares of public sector companies; must garner more non-tax revenues; and must increase effective tax collection — not only through buoyancy, but also by better enforcement and removal of myriad exemptions. He knows full well what deficits can do. And why he can’t have expenditure-driven inclusive budgets when the effective corporate tax rate is just 22 per cent. So, I think he will do what needs to be done. Or at least, I hope so.

Ella Fitzgerald used to sing, “Bewitched, Bothered and Bewildered”. Let me croak, “Confused, Worried and Hopeful”.


Published: Business World, July 2009


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