Shedding his trademark conservatism, Union Finance Minister Pranab Mukherjee made bold moves that, he hopes, will catapult India into a high-growth — and sustainable — orbit. His Budget for 2010-11 smartly blends fiscal correction with tax relief in a year when domestic recovery seems to be firmly setting in although doubts still persist globally.
Projecting a promising macro-economic picture of 8 per cent growth, 4.5 per cent inflation and 5.5 per cent of GDP fiscal deficit for the coming year, Mukherjee did not lose sight of the various small things that buttress the modest Budget estimates.
He gave a firm timeline for implementing the biggest of all tax reforms — the Goods and Services Tax regime from April 1, 2011 and the Direct Tax Code from the assessment year 2011-12. The market loves certainty — the Sensex jumped 415 points before closing 175 points up — after four disappointing years.
He put more money in the hands of 25 million taxpayers; those earning over Rs 8 lakh a year will save a neat Rs 4,300 a month. He took a host of other small measures that got lost in the din the Opposition raised after he hiked the excise duty on diesel and petrol by Re 1 a litre, making them dearer by Rs 2.67 a litre and Rs 2.58, respectively in Delhi.
Interestingly, the Finance Minister seems to have taken note of his Chief Economic Advisor Kaushik Basu’s observation of how the long-term plot is oft lost in pursuit of the short-term.
For instance, he promised to award banking again to private companies and NBFCs — Aditya Birla Group and Anil Ambani’s Reliance Capital were the first ones to evince interest. Banking licence was last given to Yes Bank in 2005.
Similarly, he set up a Financial Sector Legislative Reforms Commission to not just weed out irritants in existing laws but also to bring them in sync with today’s dynamic market environment. He gave form to Raghuram Rajan’s idea of a Financial Stability and Development Council to resolve issues falling under the purview of more than one regulator. Finally, an Independent Evaluation Office to objectively assess public programmes will ultimately serve to put an end to schemes that achieve little.
A practical Mukherjee did not rush to exit from the stimulus but shrewdly protected the government’s revenues by raising about half the extra Rs 46,500 crore indirect tax revenues largely from two measures — a 5 per cent customs duty on crude imports and a Re 1 excise hike on petrol and diesel.
The impact of a 2 percentage point increase in Cenvat that in effect leads to a convergence of the tax rate on goods and services at 10 per cent lends credence to his intent of GST introduction next year. He had to do this to subsume the Rs 26,000-crore giveaway to the aam aadmi by raising tax slabs. Nevertheless, his new tax measures earned him an extra Rs 26,500 crore.
What can queer the pitch though is the inflation that the Budget appears to stoke and uncertain global market conditions that can undermine his ambitious plan to raise Rs 40,000 crore through sell-off.
A rise in petroleum products prices, Mukherjee said, will directly add 0.41 per cent to the wholesale price index based inflation. There is a risk it will seep into the manufacturing and services sectors with global commodity prices already on an upswing.
The fear of food price-induced inflation, currently pegged at 8.63 per cent, transforming itself into a high generalized inflation looks real. The Budget, however, assumes inflation to average at 4.5 per cent for 2010-11.
Even if it does call for major policy adjustments, Mukherjee’s Budget Estimates for 2010-11 are modest.
He has kept non-Plan expenditure more or less at this year’s level and, in fact, slashed petroleum and fertiliser subsidies. The total expenditure has risen just 8.5 per cent. Revenue receipts, on the back of robust corporate tax collections and a one-time gain of Rs 35,000 crore from 3G auction, are projected to jump 18 per cent (again modest given his estimate of a 12.5 per cent nominal growth in GDP), letting him keep his promise of cutting deficit to 5.5 per cent of the GDP for 2010-11.
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