By Manish Sharma

The Finance Minister (FM), Pranab Mukerjee, perhaps has done a better job than was expected of him. There maybe a number of critics pointing to the high fiscal deficit (6.9 per cent) and inflation of the Indian economy which is witnessing moderate growth compared to what it has seen over a year ago. However, the FM and his government are clearly happy with the results of its stimulus resulting in public spending starting mid last year. With an expectation of over 8 per cent growth in 2010-11, Mukerjee decided to only slowly roll back the stimulus, increase excise duty, broaden the service tax base, selectively increase customs duty (including on oil) and rationalize the personal income tax structure.

He took a step further and indicated that liberalization, forward-thinking and divestment were still on course (Rs 250 billion is the target). As a result, he suggested, there is a possibility of allowing more private sector corporations into the banking sector, providing tax incentives for the infrastructure sector while allocating as much as 45 per cent of planned expense for it. He also talked of a one-pager clearing ambiguity in FDI policies by recognizing two important aspects that of ownership and control.

There are critics for his emphasis on the agriculture sector or the past stimulus and expense on the hinterland of India. What is often not known is that a large part of India’s recent growth has come from the hinterland including B city towns and cities rather than the dominant and visible metro / urban parts of India. This, sources in the Finance Ministry claim, is the reason why the FM has not pulled out the stimulus package or removed his focus from the rural parts of India where pent up demand could push the economy to higher levels of growth in the future. In effect, they suggest, Mukerjee has an eye into the future and is ready to risk a high fiscal deficit even as critics rip him for it.

Supporters of his approach point out that India does not have a social security system that most developed nations have and so spending will always be on the high side. They also point out that some of the losses due to poor efficiency or lack of transparency could be addressed by the government’s plans for E-governance. That is to be seen but there is some hope in that. As a result, fiscal deficit for the financial year (FY) 2011 has been pegged at 5.5 per cent. Rolling targets for FY’12 and FY’13 are estimated at 4.8 and 4.1 per cent, respectively. The stock market has responded positively perhaps since they expected less and the restricted market borrowing programme for the next fiscal pegged at Rs 3,450 billion, lower than this year’s target of Rs 4,500 billion. Still, the move to keep the accounts in order might trigger the cost-push inflation owing to a hike in excise rates and custom duty on crude oil. This is a gamble the FM seems ready to take.

For industry and individuals, the mixed bag approach seems to be the thrust. Take from one hand and give from hand and in all this giving and taking some may notice they got precious little. Consider what industry got – an increase in cenvat excise duty by 2 per cent to 10 per cent, a reduction in corporate surcharge from 10 per cent to 7.5 per cent with an increase in MAT (Minimum Alternate Tax) to 18 per cent from 15 per cent. Individuals saw the highest tax slab increase from Rs 500,000 to Rs 800,000 resulting in a minimum saving of Rs 50,000 at the lower end. The changes in tax slabs would benefit 60 per cent of taxpayers and the impact could be a saving between 4 and 6 per cent. This in a way softens the blow if not divert their attention from increasing fuel prices, cars, TVs, air-conditioners, gold and silver resulting from the increase in excise duty.

What is apparent is that Mukherji will closely watch the gross tax receipts of Rs 7,466 billion - the amount equal to Non-Plan expenditure. Any shortfall in tax revenue could upset his calculation but there is an assumption that he will hinge his hopes on disinvestment, the 3G auction (estimated to be valued at over Rs 300 billion) this April and a growing economy. Wait and watch is all that any one could say but if the FM needs to make this a Budget known for foresight rather than the fact that the Railway Budget and Union Budget were for the second time presented by individuals from West Bengal, he needs his hopes to turn into reality.

Indiabiznews, February 27, 2010