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This budget speech of P. Chidambaram has his words. It is not his budget. Some have called it prudent. For me it reflects the inheritance of Indira Gandhi’s ideas that the Congress ruling family has bought unquestioningly. The priority is social inclusion, not growth.
This budget, like the 1991 budget, was a make or break budget. Growth has almost halved, inflation and particularly food inflation is rampant, savings have fallen sharply (household and corporate, which had shown consistent growth, have fallen sharply), as has investment (domestic, private, public, and foreign), the current account deficit is at a record high. The threat of downgrading Indian debt to junk status was very real. Government borrowings, and hence deficits, have returned to 1991 levels. Chidambaram therefore claims to put growth as the highest priority. So are social inclusion, reducing the deficit, cutting inflation and restoring the current account in the balance of payments to earlier levels (below 2 per cent versus the current 5.4 per cent). His numbers show him as succeeding on the deficit. Many schemes and high expenditures target inclusion. But neither growth nor inflation gets much attention.
His actions are largely politically oriented and reflect the priorities of the first family — towards policies that they think lead to election victory. He has not rationalized and made more effective the vast sums spent on the Mahatma Gandhi National Rural Employment Guarantee Scheme, public distribution of grains and kerosene, the rural health mission, and so on. Indeed allocations are raised. He has provided a modest Rs 10,000 crore for the expensive and ambitious food security bill. If implemented it will be hugely expensive.
The arithmetic shows the fiscal deficit is down. Is it sustainable? The instruments have been the raising of diesel prices, the promise that this will continue, over Rs 58,000 crore from disinvestment in unspecified public enterprises, the sale of telecommunications spectrum, and some small additional taxation. In 2012-13 he also pushed some committed payments into the next year. The disinvestment and spectrum revenues seem high in light of past experience
He has raised the duty on silk imports (helps in the Karnataka elections). Cheap Chinese imports flooding India are untouched, though cheap capital equipment imports have higher duties, even where our capacities are inadequate.
There are no tax measures to stimulate exports. For example, iron ore exports, hit by domestic scams and world recession could have done with lower taxes. Coal imports are subject to duties as is gas. We import increasing quantities of coal and most of our gas, and they could have been made cheaper. The commerce minister is to bring out a policy on exports and imports.
There are measures to encourage long-term foreign institutional investment versus the present volatile short-term FII. However, the real block to foreign direct investment is the maze of procedural delays (land, environment clearances and so on). The budget could have signalled that this bureaucratic mess will be tackled.
Chidambaram rightly took infrastructure as the best stimulant for growth. However, poor regulatory responses are the root cause of declining investment interest. Road projects are bedevilled by poor forecasting of revenues by private parties, and problems with land, environment clearance and so on. The proposed road regulator will take at least 18 months to be effective and the government should evolve methods now to keep a sensible floor price in accepting quotations.
Power projects are held up by the huge losses of the state electricity boards and the unwillingness of investors to risk investing when these customers are unable to pay bills. The budget has provision for another loan write-off (or securitization), a band-aid, not a solution. It will not tempt private investment (or even NTPC) to power. Coal and gas unavailability has led to stranded capacities. Pool prices are no solution. A coal exchange for imported coal might help. So will slashing customs and excise duties. This budget is unlikely to stimulate much infrastructure — roads and power.
The corporate surcharge on larger companies will disincentivize investment. The revived investment allowance for investments over Rs 100 crore must be carried forward for five years or so to be effective.
The National Bank for Agriculture and Rural Development is given funds for investments in agricultural storage by the public sector. There is no attempt to get the private sector into investment in capital expenditures for agriculture — for canals, storage and so on.
Thus, the strong impetus to growth that Chidambaram promised has petered out into a small gasp.
Proposals for inflation-linked infrastructure through tax-free bonds are welcome and could stimulate domestic financial savers. So could incentives for non-resident Indians.
But the budget could have done more to stimulate investment. There are too many bottlenecks, apart from harsh tax treatments, bureaucratic clearances, problems in supply of coal, gas, iron ore and so on. Chidambaram has done little to reassure investors (foreign and domestic) that thoughtless tax measures would be simplified and made fair (retrospective taxes, lack of clearly defined and consistent rules on transfer pricing, single rates nationally for indirect taxes, and so on). He is waiting for a committee report, for examination, consideration and action. The issues are well-known and any wide-awake bureaucrat could have told the minister.
A major budget task was to tackle corruption and black money. There is a voluntary disclosure scheme for service tax evaders. There are no measures regarding black money.
The budget speech devoted almost an hour to measures and funds for social inclusion of scheduled castes, tribes, some other backward castes, minorities, women, and young people. These are good schemes and, if implemented well, could be of help.
The earlier revision of prices of diesel, petrol and so on, rail fare and freight increases, and a temperate rail budget with no populism, helped Chidambaram in this budget.
Some measures (not all) could have been avoided by this government. The promise that the surcharge on the super-rich and companies is to be for one year is similar to such unkept promises made in the past. The 2 per cent of net profits to be kept for corporate social responsibility is an additional tax on companies. Pooling coal and gas prices is similar to such measures that have invariably led to massive corruption.
The direct tax code and the goods and services tax are promises not kept for years. They should have had top priority if growth was a true objective. The GST that is emerging may not give us the on-tax nation we seek. Agriculture has substantial credit increase. However, the government control on agricultural marketing has led to the farmer not receiving the full benefit of rising minimum support prices.
This budget does less than was possible to stimulate growth in agriculture, industry and infrastructure. It has no credible measures to tackle inflation. The gaping current account deficit is to await the commerce ministry’s policy document. Savings and investment, which required a huge push, have only received a nudge. The social sector has received attention without looking into effectiveness and delivery. Fiscal deficit seems to be controlled but assumes disinvestment and telecom spectrum proceeds that are higher than before.
This may be a prudent budget. It does not display Chidambaram’s trademark aggression and imagination. It is unlikely to stimulate growth, moderate inflation and restore India’s balance of payments. It will not help the Congress much in fighting the coming elections.
The author is former director general, National Council of Applied Economic Research |
