Several commentators on the various television shows after the budget used practically the same words to describe the Union budget for the next fiscal year. All of them felt that the budget reflected the personality of its maker — devoid of any frills and, in fact, almost boring — but are budgets meant to be titillating? — yet pragmatic. I have not met Pranab Mukherjee and know nothing about him. But I do agree that his budget is very workmanlike and pragmatic. While there are no big-bang reforms, some seemingly small measures can have very far-reaching consequences for the future.

The main thrust of this budget is towards improving fiscal discipline. The fiscal deficit for the fiscal year 2010 is sought to be brought down to 5.5 per cent of the gross domestic product, with a promise to reduce this even further during the course of the next couple of years. Importantly, the finance minister seeks to do this without taking recourse to any draconian measures of taxation — quite the contrary, because his new tax proposals have been relatively mild. In fact, the increase in net tax revenue due to additional taxation is estimated to be only Rs 20,000 crore.

Of course, Mukherjee has luck on his side. Unlike the current year, he no longer has to provide for additional resources in order to finance stimulus packages, since the economy has been restored to health. Moreover, he has already paid off all the arrears on account of the last Pay Commission award. Neither does he have to write off bank loans for farmers. The last two items account for a tidy sum of Rs 35,000 crore. The finance minister also hopes to collect fairly large sums from disinvestment (Rs 40,000 crore) and the auction of 3G telecom licences (Rs 35,000 crore).

Apart from disinvestment — which the government can in principle carry out in small doses for several years — the others are fortuitous in the sense of being one-off items. Neither can the finance minister claim much credit for them. However, what he can claim credit for is his promise to curtail non-plan expenditure. The budget estimates that this will grow only by about 5 per cent. Of course, we will have to wait till the end of the next financial year to see whether he has actually achieved this target.

His new direct tax proposals are relatively simple. He has given the middle class an unexpected gift by widening the tax slabs so that the higher marginal tax rates kick in only at much higher levels of income. Households willing to invest in new infrastructure bonds can also deduct an additional Rs 30,000 from taxable income. The direct tax proposals on the corporate sector are more or less revenue neutral, with the surcharge being reduced to 7.5 per cent; but the rate of minimum alternate tax is being increased to 18 per cent.

Practically everyone had expected the finance minister to reverse the earlier reduction in the rate of central excise taxes. The rate had been reduced as part of the stimulus package, and even the corporate sector was prepared for some increase. Mukherjee must have pleased everyone by effecting a very modest increase of only 2 per cent. Quite surprisingly, the most controversial feature of the budget — one prompting the unprecedented walk-out by all Opposition members of parliament — was a similar decision to increase the customs duty on crude oil and refined petroleum. The customs duty on these products had been reduced earlier when the international price of crude had reached stratospheric levels. Since current crude oil prices are considerably lower, the finance minister sought to restore duty to its earlier level. Of course, this increase will have an impact on prices. But, so will the across-the-board increase in excise rates. Why did the Opposition not protest when excise rates were increased?

One of the most important features of the budget has attracted relatively little attention. This is the attempt to widen the reach of the service tax. The transport of goods on the railways, air travel and real estate will now be subjected to service tax, and clearly more items will be included in due course. The services sector as a whole is now the overwhelmingly largest contributor to national income. Unless this sector contributes its share of tax revenue, the government will be confronted with two very stark options. Either it will have to impose very draconian rates of taxation on other sectors, or it will have to live with a diminishing ratio of tax revenue to GDP. This ratio has already dropped quite alarmingly to just over 10 per cent from the earlier level of 12.5 per cent before the onset of the global recession. This has caused the revenue deficit to reach 4 per cent of GDP. Clearly, there is no way in which the health of the exchequer can be restored unless the base of taxation is widened. Moreover, the new areas to be brought into the tax net must be precisely those areas which are likely to grow at levels faster than the average rate of growth of the economy. The services sector stands out as the prime candidate!

It is almost an axiom that no budget can be without at least some minor irritants, and this budget is no exception. There was at least one act of commission which I found particularly disappointing. This was the throwback to a bad practice of the past. Earlier finance ministers delighted in proposing several exemptions to the normal tax rates. These exemptions typically did not have any obvious rationale, and so the blatant use of discretionary powers always raised the suspicion that the exemption was brought about through the successful efforts of some powerful lobby. This year too, some of the exemptions granted by Mukherjee defy logic. Why on earth do toy balloons deserve an exemption? Or, for that matter, magnetrons used in microwave ovens? The latter is not an item used by the ‘common man’, while there are surely many more important steps the government could have taken to improve the lot of children.

What can we expect in the future? Mukherjee has promised to implement the goods and services tax by April 2011. If he does keep his promise, then the next budget will be amongst the most important ones in several decades, since it will transform the system of public finance in the country. Clearly, no one will be able to call that budget boring or drab.