Short-term pains for long-term growth. That more or less summarises Finance Minister Pranab Mukherjee’s budgetary exercise for 2010-11. The stimulus-aided economy is well on the road to recovery with an anticipated growth of over 7.2 per cent during the current fiscal, although at the cost of an unsustainable high fiscal deficit of 6.8 per cent of the GDP. The need of the hour is to return to the path of fiscal prudence while sustaining the growth momentum. And when the clamour for a partial rollback of stimulus gained ground mainly backed by the Prime Minister’s Economic Advisory Council and cautiously ratified by the 13th Finance Commission the nation at large knew that it was coming. The people, the corporates as well as the bourses had already factored it in. All were prepared for a hike in excise duty to 10 per cent, as it was still lower than the pre-stimulus rate of 12 per cent.
But when it finally came, all hell appears to have broken loose, at least in the Lok Sabha when Mr. Mukherjee announced the changes. In an unprecedented move, almost the entire Opposition trooped out of the House in protest against the hike in customs and excise duty on petrol and diesel in view of its cascading effect on inflation. Ostensibly, no one had anticipated that the government would also touch the petroleum fuels, especially when the Kirit Parikh Committee recommendations still lack a political consensus within the UPA.
What everyone missed out on was the fact that the cut in duties on petroleum goods which Mr. Mukherjee essentially rolled back was effected when crude oil in international markets was ruling at an all-time high of about $ 147 a barrel. Now that crude is at nearly half that price, why should the government bear the wasteful subsidy, especially when the oil marketing companies are groaning under the burden? Sound economic logic, perhaps, but not politics.
What gave the Congress-led UPA government, in its second term in office, the courage to seriously tread on the path of fiscal consolidation and pave the way for a high growth trajectory is that this is its second budgetary exercise and no major elections are on the way. The opportunity can be gainfully utilised to usher in bold systemic reforms, chart the road map for revolutionary changes in direct and indirect taxes by way of the proposed Goods and Services Tax (GST) and the Direct Taxes Code, rationalise the mechanism of targeting subsidy at the needy and, at the same time, allocate enough spending on infrastructure development and farm sector growth while switching over to a transparent direct subsidy payment for the oil sector, instead of resorting to off-budget transactions.
Mr. Mukherjee also ensured that public spending is not beyond means and as a result of which government borrowings during the year are restricted to Rs. 3.45 lakh crore, a fact that has enthused the market and corporates.
True, prices of cars, white goods and other household appliances have gone up with the rollback in excise. But, alongside, he has tried to make up for this by changing the personal income-tax slabs which will help the aam aadmi and the middle class save enough during the year. The strategy, perhaps, is that higher disposable income would itself propel growth through higher consumer demand or else lead to long-term savings through infrastructure bonds. A high savings rate is the best bet for any country as it offers long-term funds for infrastructure.
Armed with a strategy chalked out by the Finance Commission, Mr. Mukherjee has also budgeted for a mop-up of Rs. 40,000 crore during 2010-11 for spending on social sector programmes. Alongside, while raising a net revenue of about Rs. 20,500 crore by tinkering with the entire taxation regime, Mr. Mukherjee has sought to ensure a return to fiscal prudence by pegging the fiscal deficit at 5.5 per cent of the GDP in 2010-11 and 4.8 per cent in the next fiscal year.
As for inflationary expectations, Prime Minister Manmohan Singh allayed fears saying: You must look at the total picture emerging from the budget. The net revenue gain for the Finance Minister is only Rs. 20,000 crore. In an economy as large as India, this resource mobilisation effort and balance should not trigger any inflationary expectation.
source: www.thehindu.com
