Analysis of the UNION BUDGET 2009-2010

chillibreeze writer — Prosenjit Das

Pranab Mukherjee scripted history on Monday as he became independent India’s first finance minister to present budgets on either side of the elections - the interim budget on 16th February, 2009 and the regular union budget on Monday. Dr Manmohan Singh, Yashwant Sinha and Jaswant Singh had come close to achieving the distinction recently, as they had presented interim budgets, but, unfortunately, their respective parties were voted out of power in the elections which followed. Moreover, the finance minister became the first of his kind to present budgets with a hiatus of as long as a quarter century between them, the last one being presented in 1984 during the Indira Gandhi regime. Nothing has remained the same since the pre-reforms era except, of course, the wide-scale expectations across all classes of people and businessmen alike. Spectacularly re-elected to power by the Indian population which reposed faith on the Congress-led UPA and not restrained by the limitations of a coalition government, Pranab Mukherjee had his task cut out – that is, to formulate the optimal budget as growth targets, corporate reforms, job losses, inclusive policies, insipid exports and fiscal discipline vied for his attention. On Monday morning, as the nitty gritties of the union budget 2009-2010 were laid down, some would say that the FM did well to meet the expectations. However, Dalal Street seemed to think otherwise.

The foremost aim of the budget, as expected, was to counter the impact of the recession and to revive the sagging growth rate to 9 per cent through inclusive growth and at the same time peg back the spiralling fiscal deficit from reaching prohibitively high levels. A central fiscal deficit of 6.8 per cent and no clear road map for reaching the FRBM targets may signify serious concerns, especially if India is unable to meet the target of 9 per cent GDP growth by 2014. At a time when funding inclusive growth is a major headache for the government, the FM, in a thanksgiving gesture, has hiked the tax exemption limit by Rs. 10,000 and abolished the 10 percent surcharge on Income Tax. Although this would not lead to major savings in terms of income taxes, yet it sends a strong message to the people of India and reinforces the importance of spending capacities in a consumption driven economy. The abolishing of the Fringe Benefit Tax (FBT) and the Commodity Transaction Tax (CTT) has been welcomed by the nation. India Inc has expressed satisfaction over the possibility of bolder tax reforms, however, the mood was somewhat dampened by the rise of the Minimum Alternate Tax (MAT) and the persistence with the Securities Transaction Tax (STT).

Amidst rising government expenditure and shooting fiscal deficits, the FM has done well to focus on infrastructure, as a compromise on that front would have led to unfavourable long term impacts on growth. In an effort to stimulate investments in the sector, the Indian Infrastructure Finance Corporation Limited (IIFCL) is set to refinance bank loans in vital projects up to a maximum of 60 per cent and a total of the order of Rs 1000 billion through public private partnerships (PPP). Moreover, the budget allocation for highways has been raised by an unforeseen 23 per cent. While these measures no doubt, will help the government tighten its purse strings, PPP requires a controlled and regulated environment to be successful, something to which the finance ministry has not made any reference. Further, the budget does not speak about bond market reforms, which could inject liquidity into the markets, thereby facilitating long term debt generation which is essential for infrastructure development.

An unprecedented 34 per cent raise in defence allocation sends out strong signals from a government which has traditionally put defence issues in the backburner and is one of the few facets of the budget, on which, even the opposition party will not differ.

Obliged to maintain the ‘human’ face of the budget and under fire to rationalise policies regarding subsidies, the budget has done well to propose a rise in agricultural credit by Rs 38,000 crore and to incentivise the interest rates of farmers who pay on time. Moreover, underscoring the need for rural development, the budget has seen increased allocations for the NREGA and the Bharat Nirman Programme by a whopping 144 and 45 per cent respectively. However, the age old problem of finding an effective conduit, so that the money that is meant for the rural poor reaches its target, still persists and the budget has not made any mention about it. Historically, we have seen the intent of the government dangling off at a surprisingly superficial level and we can only hope for the better this time around.

Divestment of public enterprises, which was widely expected from this budget and could have been a potent source of funds for the cash-strapped government, has been meagre at best. So have been any significant reforms or benefits for the health care sector which suffers from a dearth of infrastructure. However, as Mr Mukherjee put it, the expectations from this budget were more than could be met and it was an exercise to balance out populist and pragmatist ideas, tilted a bit towards the aam aadmi. A single budget is certainly not the end of the reforms process. With glimpses of reforms in fertilizer subsidies and signs of decoupling petrol prices, the budget provides a ray of hope that it is the first of a series of reforms-oriented growth accelerator budgets in the years to come.

Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in November, 2009. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.

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