Monday July 13, 2009

A borrow-and-spend budget

INDIA DIARY By COOMI KAPOOR

India Inc is disappointed that the newly-elected government has not pushed ahead with economic reforms and liberalisation.

ALL government budgets are part economics, part politics. Finance ministers use the annual exercise to take stock of the national purse while bestowing goodies on electorally-important constituencies.

Boosting growth, ensuring equity, allocating funds for vital infrastructure projects, prioritising resource distribution among conflicting claimants and, above all, levying taxes on earning individuals and businesses to keep the wheels of government running, of course, is an integral part of any budget.

But this year Finance Minister Pranab Mukherjee’s Union Budget for the newly-elected United Progressive Alliance government of Prime Minister Manmohan Singh seemed to tilt rather heavily towards politics.

Despite official claims that it was a growth-oriented Budget, the most dominant concern was for the aam aadmi (common man). It was economic populism, pure and simple. Small wonder, then, that everyone else felt disappointed.

On July 6, when Mukherjee rose to present the Budget, expectations were high. It was hoped that the UPA-II, no longer dependent on the Communists for survival, would push ahead with economic reforms and liberalisation.

With comfortable numbers in Parliament, the government was in a position to open up the economy to foreign investment, carry out structural financial sector reforms, raise limits on foreign investment in Indian companies, and sell off small chunks of equity in public sector banks, insurance companies, etc. In short, unshackle the entrepreneurial energies of Indians for faster economic growth.

However, Mukherjee had different ideas.

Hardly had he read aloud the first half of the Budget speech, when it became clear that the 74-year-old Congress Party veteran had no intention of changing his socialist colours at this late stage in his life.

So, not only did he praise the nationalisation of 14 large private banks by the late prime minister Indira Gandhi in 1969, but he also disavowed any intention to disinvest any stake in the state-owned banks and insurance companies.

And he offered little to anyone but to the ubiquitous aam aadmi; and he marginally reduced the tax burden on senior citizens, women and middle-income groups.

Share markets being the first to react to a Union Budget, these had opened high on Monday in the expectation of positive signals from Mukherjee.

But after registering a gain of 120 points in early trades, the markets soon reversed course. The Sensex plunged to end the day with a net loss of 870 points or nearly 6%.

India Inc had given a big thumbs-down to the Budget.

Social sector spending – on the rural employment guarantee scheme, rural housing scheme, rural electricity, Dalit (scheduled caste/tribe) villages, etc – rose to US$20bil (RM71.6bil), the outlay on UPA’s flagship rural employment guarantee programme alone rising to US$8bil (RM28.6bil) for the 2009-2010 financial year.

Also, the minimum daily wage under it was now fixed at Rs100 (RM7.40), a move bound to cause problems in the village economy because seasonal employment for tilling fields and other unskilled work fetches much less.

But what worried the economic experts was the huge gap between revenue and expenditure that Mukherjee had left uncovered.

A fiscal deficit of 6.8% of GDP was a big gamble the Finance Minister had taken in the hope that his giveaways on various aam aadmi schemes would rev up the economic engine and thus lead to higher revenue yields.

The reaction of India Inc was less than enthusiastic. For, of the total spending by the government of over US$200bil (RM716bil) in 2009-2010, over US$80bil (RM286.4bil) is to come from market borrowings.

Deficit spending on such a large scale could constrict liquidity in the system, raise interest rates on government bonds and cause pressure on the rupee’s external value.

Also, it could result in downgrading of Indian debt by the international credit rating agencies.

Curiously, the cost of the soon-to-be-launched subsidised food scheme was yet to be accounted for.

In the recent election the Congress Party had offered to provide 25kg of rice or wheat every month to every below-the-poverty line family at a highly subsidised Rs3 (RM0.22) a kg. The cost of this scheme alone could burn a hole of some US$10bil (RM35.8bil) a year.

Aside from giving sops to the export sector, raising the IT exemption limit, abolishing the 10% surcharge on income above US$20,000 (RM71,590), and doing away with a few tinkering taxes, Mukherjee was most bold in making promises.

These included the introduction of a dual Goods and Services Tax, one by the centre and the other by the states, and to try and reduce the revenue and fiscal deficit in line with the demands of the Fiscal Responsibility and Budget Management Act, and to allow petroleum marketing companies to fix their own prices, etc, – promises which everyone took with more than a pinch of salt.

As noted, the Budget is politics-centric. The state of Maharahstra in general and its capital, Mumbai, in particular were chosen for goodies by Mukherjee. Maharashtra is set to elect a new government later this year. Mumbai was allocated US$100mil (RM358mil) for civic infrastructure while farmers in Maharahstra would now get further extensions on loan repayment.

Minorities, a key section of the electorate, weren’t forgotten either, with Mukherjee setting aside over US$200mil (RM716mil) for their welfare.

Mukherjee in his fourth budget — the last time he presented the budget was in 1984, as Indira Gandhi’s finance minister — has pinned his hope on huge government spending stimulating growth.

But with the private sector remaining dispirited, his borrow-and-spend Budget may fail to spur the projected 6.7% GDP growth this fiscal year.

News

Monday July 13, 2009

A borrow-and-spend budget

INDIA DIARY By COOMI KAPOOR

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