Smoke ’n mirrors PDF Print E-mail
Tuesday, 01 March 2011 00:00
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Early in his Budget speech, finance minister Pranab Mukherjee spoke of praying to Lord Indra for a bountiful monsoon and to the Goddess Lakshmi as it was a good strategy to diversify risk. To that list of deities he needs to add, more so since he said 3 was a lucky number, Sonia Gandhi’s National Advisory Council (NAC) since his amazing expenditure compression (restricting growth to just 3.3% over 18.8% in 2010-11) will go for a toss if the NAC doesn’t roll over and die. It’s an impossible call even if that happens since the 3.3% growth is lower than even the 5% inflation the Budget assumes for 2011-12! Mukherjee spoke of introducing the Food Bill the NAC has been adamant about, but has made no allowance for this—indeed, his food subsidy Bill is projected to fall marginally to R60,573 crore as compared to the R80,000 crore estimate for the Food Bill by the NAC and the PM’s Economic Advisory Council’s more realistic R92,000 crore. Which means that Mukherjee either plans to unleash a whole set of delivery reforms—he says the Nandan Nilekani UID-led cash transfers will be in place only by March 2012—or the Budget is in serious danger of going offtrack, much like Ms Banerjee’s last Friday.


Though the Budget has many reforms, the deficit is really the key as the first thing that got the markets all excited on Monday was the R3.4 lakh crore government borrowing target. The target is understated as it doesn’t include R15,000 crore of advances from RBI and R15,000 crore of recoveries from states, but the real determinant is the deficit—the higher it is, the higher the borrowings, and the greater the pre-emption of funds by the government. One of the keys to a lower fiscal deficit in 2010-11 (5.1% of GDP as compared to the budgeted 5.5%) was one-off events—the 3G auction fetched R70,000 crore more than budgeted for (that’s 0.6% of GDP) and revising the GDP from R69,34,700 crore to R78,77,950 crore alone reduced the deficit from 5.5% of GDP to 4.8%—so, Mukherjee’s real fiscal deficit, sans the extra 3G revenues, is 5.7% as compared to the 4.8% it should have been. Neither event will re-occur this year.

None of this is to say the Budget doesn’t have major positives. Corporate tax levels, as Mahesh Vyas points out, have fallen from 35.9% when the UPA first came to power to 32.1% today and limits for FIIs investing in India Inc’s bonds have gone up substantially; the dates for issuing banking licences have been brought forward; allowing foreigners to invest in mutual funds directly is a great opportunity; infrastructure has got a much-needed boost by allowing money to be raised through SPVs, and lowering withholding taxes among others. Greater sops for housing will energise the real estate sector, a major determinant on GDP growth.

That the finance minister has not even given a new time-table for the introduction of GST is disappointing, though he plans to introduce the constitutional amendment Bill in the current session and says the differences with states have been narrowed down considerably. A whole set of reforms are on hold, to be worked out through committees and groups of ministers, though the timeline is not spelt out. This includes one on expenditure reform, on cash transfers, on innovation—a Group of Ministers on environment should please industry no end as it means there will be a larger group looking at their concerns instead of just Jairam Ramesh deciding. Various financial sector Bills are to be introduced, on insurance and pensions for instance, and it does look as if they’ll get passed this time around. Again, a big positive for reforms.

The way the markets reacted to the Budget in a sense tells the story best. As the finance minister spoke of his borrowing targets, of his expenditure reduction and the various market-friendly measures, the Sensex rose by 484 points. Later, as the impossibility of some of the targets became obvious, the markets retreated, ending the day up 122 points. The markets found it difficult to believe that, in a government so focused on the aam aadmi, the Budget would be allowed to reduce subsidies by 13%, or that petroleum subsidies could fall 40% from R38,386 crore in 2010-11 to R23,640 crore in 2011-12 at a time when oil prices are expected to soar in the near future (even if the finance minister doesn’t include the R1 lakh crore the oil PSUs will shell out on his behalf in 2010-11 and more in 2011-12, the lower figure does look curious).

Whether markets continue to rise over the next few weeks, as the finance minister hopes they will given the plethora of market-friendly measures, will depend of whether they are focused on the Budget’s maths or whether they’re convinced a fresh burst of reform is in the offing. Watch this space.


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