I should have posted this long back, but its never too late.In the end, it was a real Budget for India.Ignoring stock market expectations, finance minister Pranab Mukherjee stressed on inclusive growth following the electoral victory of the Congress-led United Progressive Alliance (UPA) in the 15th general election with an unexpectedly comfortable margin. The Budget, promised reforms,laying down a few concrete markers to signal direction and action, and then went on to deliver in actual terms by boosting total government spending by one-third to a record Rs 10.21 trillion, directed largely towards social sector programmes, and tax give aways that will provide extra income in the hands of the working middle class taxpayer both targeted at creating demand and reviving growth. This extra spending is over and above the Rs1.86 trillion announced by the government in three fiscal stimulus packages over the last seven months.India, like many other countries, is trying to spend its way out of trouble only understandable because the contraction in exports (due to recession) has shaved off a fair chunk of demand, and the decline in private consumption, another bit. As a result, the economy is demand-deficient. The thinking implicit in Mukherjee’s Budget speech is that it makes sense to let growth lead reforms at this point in time, rather than the other way around. But therein lies the mstake and the single biggest macroeconomic risk in the Budget.The cost of extra spending, especially with tax revenues taking a beating as the economy continues to expand at a slower pace, will result in a larger than expected bump up in the government’s gross borrowings, or fiscal deficit. It is projected at 6.8% of gross domestic product close to levels last seen in 1991. With interest payments projected at almost one-fifth of total government expenditure, the country is dangerously close to a fiscal disaster. Still, this is a clear macroeconomic gamble that the UPA has taken. It is on hope that the extraordinary circumstances that the country finds itself in following the global meltdown, and is based on some key assumptions and the belief that growth cannot be compromised. And, it is consistent with the UPA’s ideological stance that without growth it can push neither its political agenda for inclusion nor that for reforms. This theory also formed the core of the Economic Survey presented to Parliament last week which posited that the economy would recover from the third quarter, provided there is a normal monsoon this will become clearonly at the end of the month and the US economy bottoms out by September. Now, one can fault the finance minister for making these assumptions, but not for not thinking out of the box. However, there is a tacit admission in the way the things on social sector programmes will be spent that the existing delivery mechanism is woefully inadequate. Beginning with the National Rural Employment Guarantee Scheme, the government has progressively moved to a system of direct cash transfers essentially, disintermediating by ignoring the existing delivery mechanism.The lacuna in the Budget is that there is the promise to change this, but no commitment in practice. The short cut cannot be a solution. While growth is the central focus of the Budget, Mukherjee has left clear indications that the government is committed to the process of second generation reforms. But, given his political acumen and the fact thatthe UPA is acutely conscious of its pro-poor stance, he sought to play down the reforms he said in the Budget speech. Also, he has been careful to leave out anything that can be politically controversial. Still, not only has Mukherjee signalled his intent, but has also detailed concrete measures.The fault, if any, may have been in the understatding of delivery of the message.Mukherjee’s most important reform commitment is, ironically,on his promise to restoring fiscal discipline something that the stock markets believe he has been remiss about. While Mukherjee has suspended all fiscal rationality for the moment, he has unequivocally indicated that he is committed to the task and, more importantly, that the Budget is not the only place and time to initiate such reform, and that there will be more opportunities later in the year. Mukherjee has essentially ordained a game changer that will once and for all completely free fertilizer prices and do away with the existing complex subsidy apportioning mechanism, which has retarded fresh investments in the business. Now, farmers will be directly reimbursed by thegovernment. While Mukherjee has not explicitly said so, the government’s eventual move to a targeted subsidy regime suggests that in the long term only small and marginal farmerswill be retained in the subsidy net. The third initiative that Mukherjee has proposed, but probably deliberately not fleshed out, is the sensitive issue of petroleum pricing. It has been clear for a while that something drastic needs to be done so that the subsidy on petroleum products is restricted only to theneedy, and the minister seems to suggest that this will happen, but outside the Budget. The fourth reform effort is the return to divestment, cleverly couched in a people’s participation initiative and devoid of specifics. Here again, it is what he has left unsaid that holds the sting. By saying explicitly that the majority stakes of the government in banking and insurance companies would not be given up, Mukherjee may be implying that he has given his ministerialcolleagues considerable room to push majority stake sales in other sectors. Whether the government will seize this policy opportunity is an entirely another matter.The stateowned Oil India Ltd and NHPC ltd will hit the capital market with their initial public offeringsin August and September. Four more companies based on overall framework and design will be identified (for disinvestment) by the department of disinvestment in consultation with ministries. And, finally it is in tax reforms that the minister has lent a singular thrust. Underdirect taxes, Mukherjee haspromised stability by notchanging the rate structure. At the same time, he has got rid of all the bad taxes, such as the fringe benefit tax, commodity transaction tax and the surcharge on personal incometax,all legacies of his predecessors.Alongside, he has promised a draft direct taxcode in 45 days that will cementrates, do away with exemptions and prepare thecountry’s tax administration for a new age economy.Under indirect taxes, the biggest reform commitment has been the guarantee that thecountry will stick to the deadline of 1 April for the introduction of a dual goods and servicestax (GST). This will, for the first time, unify the country as one single economic market. At the same time, Mukherjee has provided a major building block for this transition by bringing the Indian Railways under the service tax net. Since the railways is a large entity and touches almost every aspect of the Indian economy,this will make the transition to a GST regime that much easier.In the final analysis, it is clear that the Union Budget for 2009-10 has, recognizing then unprecedented global crisis,made growth its clear focus. At the same time, it has made astatement of intent and quietly launched initiatives that reaffirm the government’s commitment to second generation reforms. It is, as the finance minister said at the outset of his 100-minute speech, the first policy thrust of a new government that has secured another five years for itself and the politics of which is defined by inclusive growth. Hail Mr Pranab for your efforts if it really works for India!
