Budget 2009: Right, Left, Centre or Nowhere!?

by Unmesh Sharma

Mr Pranab Mukherjee took over the office of Finance Minister in 2009, 25 years after his last stint in that office. The needs of India’s post- 1991 economy are clearly very different from 1984. The economy is especially under strain from the global credit crisis. Mr Mukherjee has the responsibility of managing multiple interests: the left wing proponents in the party, the fiscal strain on the economy and the expectations of the people who have provided UPA with a firm mandate. At the same time he also has to keep an eye on upcoming state elections (notably in Maharashtra).

Something for everyone, Everything for no one

The budget tried to play to every gallery. In various news reports, right wing political analysts termed the budget as left-of-centre, while the leftists called it elitist and implied that it was too far to the right. Whenever that happens in India, it tends to show that the budget was either ‘just right’ or just ‘a maintenance budget’. I however think it was somewhere in the middle. The budget speech made a lot of the right noises. The Finance minister highlighted his focus on the rural economy (extension of the farm loan waiver and increased allocation to the rural employment guarantee scheme), infrastructure (both rural and urban) and disinvestment.

He also fulfilled his political duty by invoking late Smt Indira Gandhi while discussing state owned enterprises and pulling off a subtle stunt. (The skipping of two paragraphs aimed at minorities and then reading them out on receiving a note was quite effective. It showed the UPA’s focus on the minorities while quelling noise on blatant appeasement).

There was also a mention of Mumbai (storm water drain project) keeping in mind the upcoming state elections.

Generally negative reaction

The budget speech was however more a statement of intent and less of a plan. That is probably what spooked the market. On the day of the budget, the BSE Sensex fell 900 points (nearly 6%). The Indian Rupee depreciated 1.4% against the U.S. dollar while the government bond yield increased sharply by 16 basis points. To be fair to the UPA government, my personal opinion (as a participant in the financial markets) is that unnecessarily high expectations were built in before the budget.

That is not to say however that everything was right with the budget. The market clearly expected the UPA government to go on a path of fiscal consolidation. This has not come through. In fact, the budget finance minister’s estimate for fiscal deficit of 6.8% of GDP was higher compared to expectations of 6.0-6.5%. It is also notable that the target set by the UPA-1 government in the interim budget in February was 5.5% of GDP. It seems that the shortfall is mainly due to the loss in revenue from the changes in personal income tax and no reversal in any of the cuts in excise duty and service tax.

Rating agency S&P has estimated that if we include state government deficits and off-balance-sheet items such as oil and fertilizer bonds, the deficit could reach a whopping 12% of GDP in fiscal 2009-2010. This is clearly alarming. While the finance minister did mention that oil subsidies have to be brought under control, there were no concrete announcements made in the budget speech.

Importantly, the fact that the government will have to borrow even more, has other implications. It could lead to the crowding out of private investment, either directly or via higher interest rates.

At the same time, we should indeed note that there have been some outright positive outcomes. The irritating fringe benefit tax has been withdrawn. The personal income tax surcharge has been removed, which helps only people in the highest income brackets but at the same time is likely to reduce tax evasion. (Even the US Republicans would have been proud of this move).

Some optimistic analysts are giving Mr Mukherjee the benefit of the doubt. The primary argument is that this was a budget focussed on growth versus consolidation. The government may also have erred on the side of caution, perhaps influenced by the volatile news flow on the monsoon. Some analysts also believe that the revenue growth estimates in the budget are too conservative and we may see some positive surprise by March 2010.

These are credible arguments but we wait and watch for some key upcoming events to get a handle on whether the UPA’s actions match their words.

What would we look for now?

Mr Mukherjee clearly indicated the government wants to return to fiscal consolidation at the earliest. We have to keep an eye on the report by the 13th (Kelkar) Finance Commission. The deadline for this is October 2009. This is likely to help get a sense of the roadmap for fiscal consolidation in the medium term. The contents of the new Fiscal Responsibility and Budget Management Act (FRBM-2) are also very important from this perspective.

Mr Mukherjee has also promised to release a new ‘Direct Taxes Code’ within the next 45 days. The bill is aimed at replacing the Income Tax Act of 1961 and some other tax laws, and will be tabled in the Lok Sabha’s winter session. This is aimed at simplifying the tax structure and can be path-breaking if correctly framed and implemented.

What should the BJP do?

S&P has rightly mentioned in their report that “the hefty fiscal deficits and debts outstanding (general government gross debt estimated at 85% of GDP at the end of March 2009) are two of the most significant negative factors…”. The BJP is clearly not under pressure from coalition politics, historical baggage and other compulsions that the UPA is subject to. It is time that the BJP come up with their own shadow budget, Instead of nit-picking in single aspects, it is time to ‘up the game’. This is an opportunity to cement its position as a credible and constructive opposition. It should present a paper in the public domain which provides a constructive criticism of the budget and present alternatives. (This is also likely to go down well with the urban population in cities such as Mumbai and may help in the upcoming state elections).

In summary, the government has moved away from the far left. Its lack of dependence on support of left parties to keep its majority in parliament is showing in its commentary. At the same time, it is also clear that the UPA government is most comfortable with its slightly ‘left-of-centre’ positioning. The BJP has to use the next five budgets as an opportunity to present shadow budgets and seem constructive (versus opportunistic or disruptive). That will be a big step in emerging as a credible alternative in election 2014.

The views expressed here by the author are his personal views, and do not represent the views of his employer.

Comments

Copyright © 2009 Friends of BJP — Because India Deserves Better