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Questions on failure to spend on asset-creating projects

New Delhi, Feb. 17: Finance minister P. Chidambaram today handed out lollies to retired defence personnel and students from economically disadvantaged groups, and tax breaks to badly roiled sections of India Inc such as the automobile industry.

Business was gung-ho over the interim budget’s duty cuts that are designed to boost the sale of cars, mobile phones, fast-moving consumer goods and machinery.

But economists were questioning the broad assumptions in his overblown estimates of tax collections that underpin his budget forecast for 2014-15 as well as his core strategy of splashing out money on interest payments, subsidies and wages and pensions instead of spending on the creation of capital assets.

Last year, Chidambaram had taken a sideswipe at his predecessor Pranab Mukherjee in his budget speech for being overly ambitious in plan spending and excessively conservative in non-plan expenditure.

This year, the change in the strategy has had a stark impact: the revised estimate of plan spending has been slashed by 14.3 per cent to Rs 475,532 crore from the budget estimate of Rs 555,322 crore. Moreover, plan spending next year has been capped at Rs 5.55 lakh crore, the same as last year’s budget estimate.

The non-plan spending in 2013-14 has been raised by about Rs 5,000 crore to Rs 11,14,902 crore. In 2014-15, it is projected to grow 8.8 per cent to Rs 12,07,892 crore. Food, fertiliser and fuel subsidy will account for Rs 246,397 crore of the total non-plan spending next year, slightly higher than the revised estimate of Rs 245,452 crore in 2013-14.

Plan expenditures usually create capital assets and are estimated after discussions between the ministries and the Planning Commission.

Non-plan revenue expenditure keeps the administration running and is largely accounted for by interest payments, subsidies, wage and salary payments to government employees, grants to states and Union territories and pensions.

The question of plan expenditure has assumed significance ahead of the general election against the backdrop of concerns about economic recovery.

From the advantageous position of not being in power, the BJP has been underscoring the need to link expenditure to asset creation. Critics have also accused the UPA of spending huge amounts of money on unproductive projects in the name of welfare while neglecting segments such as manufacturing.

In 2012-13, then finance minister Pranab Mukherjee had increased plan expenditure by 18 per cent to Rs 521,025 crore from Rs 441,547 crore — which was higher than the 15 per cent increase that had been projected in the Approach Paper to the Twelfth Plan for 2012-13. But he had also raised non-plan expenditure by almost 19 per cent to Rs 969,900 crore from Rs 816,182 crore.

Chidambaram had been finance minister between May 2004 and November 2008 before taking charge again from July 2012. Mukherjee was appointed as finance minister on January 24, 2009, and demitted office on June 26, 2012, after which he was elected President.

The interim budget for 2014-15 is anchored in the assumption that gross tax revenue will rise by 14.7 per cent to Rs 12,35,870 crore from Rs 10,77,612 crore in the budget estimate for this financial year — a shaky forecast considering that the economy isn’t expected to rebound anytime soon.

At a media conference after the presentation of the interim budget, Chidambaram took issue with the concept of an “effective revenue deficit” and the quixotic way spending was being classified by the departments and ministries as revenue and capital expenditure.

The “effective revenue deficit” was a watered-down proxy fiscal target that Mukherjee had introduced four years ago to make it easier for the government to meet its statutory objectives of achieving fiscal rectitude.

Economists and pundits will continue to quibble over whether or not the government should over-emphasise plan or non-plan spending. In July 2011, a high-level expert committee on efficient management of public expenditure headed by former RBI governor C. Rangarajan had said the distinction between plan and non-plan spending had become “dysfunctional” and recommended that the “distinction in the budget should be removed”.

Chidambaram’s interim budget targets greater subsidies to the poor but still aims to cap fiscal deficit at 4.1 per cent of the GDP — a burden the new government may struggle to shoulder because the finance minister has deftly passed on a Rs 35,000-crore oil subsidy bill that should have been paid between January and March this year to the next fiscal.

A past master of surprises, the finance minister announced that he had managed to limit the fiscal deficit this year to 4.6 per cent of the GDP “well below the red line I had drawn last year”.

Motown is chuffed with the prospect of duty cuts that have been shaved from 12 per cent to 8 per cent for small cars and from 27 per cent to 24 per cent in the case of large cars that measure more than 4 metres in length. The duty cuts have been granted till June 30 and will be up for a review when the new government presents the regular budget. Luxury carmaker Mercedes Benz cut the Delhi ex-showroom price of its GL-Class by Rs 2 lakh to Rs 72 lakh.

The budget also cut excise duties on capital goods and consumer items from 12 per cent to 10 per cent. The duty on mobile handsets was cut from 6 to 1 per cent if the manufacturer did not seek tax credits for inputs or 6 per cent when bundled with tax credits.

“The reduction in excise duties on automobiles, capital goods and consumer electronics is welcome as this will help revive demand,” said Kris Gopalakrishnan , president of Confederation of Indian Industry (CII).

Car sales fell by over 9.6 per cent in the calendar year 2013 while capital goods shrank by 3 per cent in December 2013 as buyers and investors waited for the economy to bounce back.

Some economists described the duty cuts as an “industry-specific stimulus package” redolent of the one in December 2009 but Chidambaram insisted that there was no comparison with the past stimulus that was across the board and part of a concerted effort to kickstart a floundering economy.

Chidambaram, however, said India’s economic growth would recover to at least 5.2 per cent in the second half of 2013-14, enabling the country close out the year with a growth rate of 4.9 per cent higher than the abysmal 4.5 per cent last year, the lowest in a decade.

With an eye to the elections, the UPA government tried to drum up support in a few key vote banks. Chidambaram promised to transfer Rs 500 crore to defence pensions to fulfil a long-standing demand for one rank one pension in the defence services. The scheme is expected to benefit around 3 million defence pensioners.

Nine lakh students from poor families who took educational loans before April 2009 will get a 57-month moratorium ended December 31, 2013, because the government has agreed to shoulder an outstanding interest burden of Rs 2,600-crore during that period. The interest will have to be paid back from January 1 this year.

The finance minister promised to review import restrictions and duties imposed on gold that was imposed last year when indiscriminate imports sent the current account deficit (CAD) soaring to $ 88.2 billion at the end of March last year. CAD this year will contract sharply to less than $45 billion, the finance minister said.

YOUR BUDGET

Some of the relief measures announced in the Union interim budget

Excise duty on SUVs, cars, motorcycles and scooters cut

Impact: Cars will be cheaper. Buyers likely to save between Rs 15,000 and Rs 2 lakh, depending on the size of the vehicle. Breather for struggling auto industry and a middle-class sop in the time of AAP

Interest moratorium on loans taken by students from poor families before March 31, 2009

One rank, one pension for ex-servicemen

Impact: Everybody likes the young in an election year. UPA takes note of Modi’s focus
on ex-servicemen

Excise duty on capital goods import cut to 10% from 12%

Relief for mobile phones made in India

Soap, TV, refrigerators, microwave ovens, computers, printers, digital cameras and DVD players may be cheaper

Impact: A leg-up for manufacturing

Service tax waiver

Storage and warehousing of rice exempt

Cord blood banks, a potential source of stem cells, exempt


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