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The finance minister, P. Chidambaram, presented his seventh budget against the backdrop of a strong domestic economy facing increasingly adverse external forces. Another complicating factor was the shadow of a general election. This made populism a political compulsion. The finance minister has put in another skilful, but ‘low-key’, performance. Although there are no major reforms or structural changes, this year’s budget will win him a lot of friends at the cost of a relatively few enemies.

His biggest success has been the excellent overall fiscal management. The profligacy of past governments has been reversed, and the ratios of the Central government’s revenue and fiscal deficits to gross domestic product are now relatively low. This has been achieved almost entirely because of tremendous buoyancy in tax revenues, which far exceeded targets. It has enabled Mr Chidambaram to keep his promise of promoting inclusive growth. He announced huge increases in the outlay on education and health. The budget also contains either new schemes or increased allocations for old schemes designed to promote the welfare of the less-privileged groups.

There are relatively few changes in taxation. A concession to populism is the increase in exemption limits for personal income tax. The peak customs duty remains unchanged, the rationale being that the appreciation in the external value of the rupee means a lower rupee price of imports. The Cenvat has been reduced from 16 to 12 per cent. The excise duty has also been reduced in sectors like automobiles and pharmaceuticals. A continuation of past practice has been the attempt to widen the tax net. Some new services will have to pay service tax. This is a welcome trend since the services sector is contributing an increasingly larger share of GDP.

In view of the continuing inflow of foreign exchange and the associated rise in domestic money supply, the primary target of monetary policy must be the containment of inflation. Some critics may argue that the budget should therefore have provided more incentives to sustain growth. The finance minister’s reluctance to reduce customs duties and corporate tax rates will have been a source of displeasure to this group. Of course, the reduction in personal income taxes, Cenvat and some sectoral excise duties will have a slight expansionary effect on the economy. However, he could have provided a direct, and hence greater, stimulus to the economy by increasing public expenditure in, say, infrastructure.

The most controversial item in the budget is the decision to waive Rs 60,000 crore worth of loans of small and marginal farmers. This was not entirely unexpected, but this does not really address the fundamental problem of increasing farm incomes and productivity. It is sad that even Mr Chidambaram had to succumb to blatant populism. Politics prevailed over economics. The budget signalled the hustings.

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