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Notice (8): Undefined variable: urlPrefix [APP/Template/Layout/printlayout.ctp, line 8]latest-news-updates/once-again-without-credibility-13933.html"/> LATEST NEWS UPDATES | Once Again without Credibility | Im4change.org
Resource centre on India's rural distress
 
 

Once Again without Credibility
-Economic and Political Weekly
 
Budget 2012, built yet again at the altar of fiscal fundamentalism, will not convince anybody.

In this era of immediate assessment it took just a few minutes for the Union Budget for 2012-13 to be given one or the other negative appellation – “lacklustre”, “anti-growth”, “back to the 1980s”, “without reform” and the like. Such evaluations forget that union budgets have long since ceased to be statements of macroeconomic policy for the short and medium term. They are now entirely accounting exercises geared towards meeting just one objective – producing a fiscal deficit that is acceptable to the stock market, foreign investor and pundit. Fiscal fundamentalism is, of course, itself a definite policy. But this obsession means that all other economic policies are made hostage to narrowing the deficit or rather to producing an artificial number that will convince the market.

The fiscal deficit of 5.1% of the gross domestic product (GDP) which Union Finance Minister Pranab Mukherjee has come up with as the budget estimate (BE) for 2012-13 has few takers. The numbers for revenue and expenditure have been played around with so much that they have lost all credibility. Consider, for instance, a major item of government expenditure – petroleum subsidies. In a year when the west is orchestrating action against Iran and there is uncertainty about the movement of global prices, petroleum subsidies in Budget 2012 are expected to decline by Rs 24,901 crore. Or is the government planning a major revision in product prices, which it has chosen not to mention in Budget 2012? Either way, few believe the numbers.

The budgets these days are forgotten the morning after. But it is instructive to look at how Budget 2011 fared, for this will throw light on the integrity of Budget 2012. Last year, total expenditure was budgeted to grow by a mere 5% (2011-12 BE over the 2010-11 actuals), non-Plan expenditure was budgeted to even decline by 1%, gross tax revenue was projected to grow by as much as 18%, and market borrowings by just 11% – all in the cause of projecting a deficit of 4.6% of GDP. And the actual outcome? Total expenditure has expanded by double the rate (10%), non-Plan outlays have not declined but have risen by as much as 9% and tax revenue has grown by only 10%, with the result that market borrowings have expanded by as much as 40% and the deficit in 2011-12 will now be 5.9% of GDP. There are many reasons offered for the complete mismatch between the budgeted and the actual in 2011-12 – a difficult global environment, poor corporate performance, rising subsidies, etc. All true, but a budget has value only if it gives some allowance for the uncertain and not if it is generated with artificially low/high numbers. What of the numbers in 2012-13? Total expenditure is budgeted to rise by a more realistic 13%, non-Plan spending at slightly less than last year (8.7%) and the growth of gross tax revenue is expected to double (20%). Should we be surprised if in February 2013 we are told once again that the target for the fiscal deficit has not been met?

The obsession with the fiscal deficit also means that during the course of the year the axe falls on those items of spending which have no constituencies to stand up for them. In 2011-12, Plan expenditure was budgeted to increase by 16.5%, in the event it has grown by only 12.6%. The 2012-13 BE projects an ambitious 22% growth in Plan spending, but what will happen during the course of the year if other items of government spending and revenue do not stick to their targets?

A government that has seen the middle class turn against it is compelled to make pathetic attempts to win it over with tax breaks. Hence the changes in the income tax slabs, higher exemption limits and so also the new exemption to interest earnings of Rs 10,000 from savings bank deposits. These are modest for a middle class that is forever thirsty for more. Besides, by already implementing the income tax rates of the Direct Tax Code without doing away with the exemptions as planned earlier, the government has shot itself in the foot. And what does it say of the government and our society that a low peak tax rate of 30% will now kick in only at an annual income of Rs 10 lakh, which is as much as 17 times the annual per capita income of Rs 61,000?
 
The deficit reduction imperative that runs through Budget 2012 also means that some of the positive decisions get ignored. One of them is the decision to abandon the piecemeal expansion of the service tax and opt for universal coverage with a negative list of 17 categories. This will reduce the power of discretion and the scope for lobbying. The increase in the service and excise duties from 10% to 12% is not going to have a major upward impact on inflation but questions must be asked of the implications of a high central service rate for the level of the Goods and Services Tax when it is introduced later. Another proposal to be welcomed is the 40% increase in allocation from Rs 10,000 crore (2011-12 revised estimates) to Rs 14,000 crore (2012-13 BE) for the hitherto neglected area of drinking water and sanitation. A third important proposal is the doubling of the customs duty on gold imports. The Indian greed for gold has been given fresh fuel in recent years by a very low import duty, which has led to an ever-growing value of imports that has strained the balance of payments. This will now change, but only if the customs authorities see to it that smugglers do not revive the hawala channel to bring in gold illegally.

The positives are, however, very few. Overall, it seems that a weak government that is doubly burdened with a marriage to market orthodoxy has no idea about how to work towards a more equitable pace of growth (if it indeed values an equitable process of economic expansion as much as a higher rate of growth). For now it prefers to look at what incentives to give the market so that the latter can take over the responsibility of increasing investment while it restricts itself to tinkering with social sector schemes in the hope that this will ensure its re-election in 2014. It looks like it is going to fail on all three counts – growth, social support and re-election.