India Budget 2010-2011:All Izz Well !

It is hard to fault finance minister Pranab Mukherjee for what he has tried to do in the new Union Budget he presented on Friday. It is a fine blend of pragmatism and vision.

The pragmatism comes from the recognition that the Indian government cannot continue to live beyond its means. Public finances had to be set right now that the Indian economy has recovered from the mild downturn.

The stated goal of bringing down the fiscal deficit from 6.7% of the gross domestic product (GDP) in FY10 to 5.5% in FY11 is as welcome as it is ambitious; but we cannot help mention that the budgeted revenue deficit is still 4% of GDP. In other words, the government will borrow up to 4% of GDP in the new fiscal year to help meet its expenses on stuff such as salaries, interest payments and subsidies, at a time when companies need funds to increase capacity and the government should be borrowing to build new roads and ports. The revenue and primary deficits will have to be watched as closely as the fiscal deficit is.

But the welcome first step to fiscal consolidation seems to have been taken. India does need to get to a fiscal deficit of 3% of GDP and a zero revenue deficit by 2015. It is no surprise that the stock market perked up only after the fiscal numbers were announced.

The finance minister is now gunning for a deep cut in the fiscal deficit—1.2 percentage points. Will it prove to be a stretch target? The Indian government has been able to make a larger fiscal correction only twice in recent history:

1991-92 and 2003-04. The ability of the current government to pull off the trick will depend on two factors: how realistic its budgetary assumptions are and how well it can keep spending under control.

Here’s a look at some of the numbers in the Budget papers. The finance ministry has implicitly assumed that the Indian economy will grow at 12.5% at current prices in FY11. Tax revenues are expected to grow faster than the economy (18%) and total expenditure is expected to grow slower than the economy (8%). This means that the finance minister has assumed a wonderful combination of strong tax buoyancy and spending discipline.

And what’s even more interesting is that the stronger tax collections are to come from excise and customs duties rather than income tax, where effective rates have been reduced. On the spending side, Mukherjee hopes to keep a tight leash on revenue expenditure even as he budgeted for an increase in capital expenditure.

What this means is that the government is planning for a fiscal correction led by a spending discipline rather than a cut in capital expenditure or soaring taxes. That makes this fiscal correction plan quite different from many of its predecessors—and seems a bit unrealistic, given the political economy constraints in India. We should also take note of the huge 32% rise expected from non-tax revenues, including disinvestment and auction of third-generation, or 3G, telecom spectrum.

The vision in the Budget comes from some of the reformist hints dropped in the finance minister’s speech. He has committed himself to the introduction of the goods and services tax and a new direct tax regime in April 2011. That means India will finally have a low and stable system of taxes—a huge plus.

Mukherjee has suggested that the money collected from disinvestment would be used for capital spending of social sector schemes so as to create assets. The decisions to give out new bank licences and to expand the bank branch network are some of the moves to deepen the financial sector and also promote financial inclusion. The promise that oil marketing companies would be paid cash rather than bonds to cover under recoveries is also a step in the right direction— both for the cash flows of the oil companies and as a step towards greater budgetary transparency.

There are undoubtedly and inevitably many budgetary moves that are either puzzling or which hurt select groups. That is part of the game. Some of the tinkering brings back memories of budget making in the 1980s. However, the overall tenor and promise of the Budget is worthy of praise, given economic and political realities in the country.

The plan has been revealed. Now comes the next step: implementation. It may not be as simple as it seems.

Source:The Mint.