Budget 2010-11: A deft balancing act

S Gangadharan / DNA
Saturday, February 27, 2010 0:08 IST
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Mumbai: Given the political constraints and the fledgling nature of the
Print
economic recovery, the budget for 2010-11 appears to be imaginatively
crafted, blending realism with rhetoric and modest effort at resource Share
mobilisation with selective tax reliefs.

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Complete Coverage
Union Budget 2010

The fine print, however, is that, the finances of the Central government are slated to
deteriorate this year, with the revenue deficit soaring past the budget estimate by Rs
46,326 crore and the fiscal deficit by Rs 32,633 crore.

With only a modicum of additional resource mobilsation - a mere Rs 20,500 crore -

Pranab Mukherjee relies heavily on an economic growth of nine per cent and more - to
lower the revenue deficit by as much as Rs 52,549 crore and the fiscal deficit to the tune
of Rs 32,633 crore in 2010-11.

By the same token, the ratio of revenue deficit to GDP is sought to be pruned to 4% from
5.3% this year and the fiscal deficit-GDP ratio to 5.5% from 6.7%.
Referring to the 7.2% growth this year, the Union finance minister averred that the fiscal
stimulus, in conjunction with a proactive monetary stance, had made this possible and he
sounded optimistic that a double-digit surge is possible in the near future.

Expressing concern over the soaring food inflation, the speech traced its causes to supply
side issues brought about by freakish behaviour of the monsoon and promised
ameliorative measures to tackle this problem.

The fiscal roadmap, chalked out by the 13th Finance Commission, has inspired the fiscal
policy and further action to cap the combined deficit of the Centre and states at 68% of
the GDP by 2014-15 would be forthcoming, the finance minister stated.

To this end, he said details would be released within the next six months and thereafter,
an annual report on the subject would be issued.

The controversial Direct Tax Code and the goods & services tax regime will be in place
only by April 2011, but Pranab Mukherjee was clearly hesitant when he observed that he
would make an earnest endeavour to have them in place by that date.

Similarly, on the implementation of the Kirit Parikh panel’s report on petroleum, he

merely noted that the Union petroleum minister would have to take the call.

The new fertiliser subsidy policy will be effective from the next fiscal and this would make
a dent in the subsidy bill, he hoped.
In a bold move, the budget took a big step forward by desisting from the issue of oil and
fertiliser bonds.

Private players can make foray into banking if they meet the criteria laid down by the
Reserve Bank; interest subventions would be enhanced for export pre-shipment credit
and this would be hiked to 2% for farmers who repay loans on time.

Disinvestment is to get a boost and spending on infrastructure and energy will be

accelerated.

A Coal Regulatory Authority is mooted as also a Finance Sector Legislative Reforms

Commission to clean up and rewrite the laws in this area.
There are reliefs galore in regard to direct taxes, with nil tax on income up to Rs 1.6
lakhs and investment of up to Rs 20,000 crore in approved infrastructure bonds would be
tax free.

Surcharge on domestic companies is cut to 7.5 from 10%, and the objective is to do
away with this levy. However, minimum alternate tax has been jacked up to 18% from
15%. Service tax stays put at 10% but the net is to be widened to yield more to the
exchequer.
With the economic recovery underway and as part of the fiscal consolidation process, the
budget has restored the basic duty on crude oil, diesel and petrol and the central excise
on diesel and petrol is jacked up Re.one per litre.

In customs, the approach has been broadly similar.

The net result of all this tinkering will be that there will be a revenue loss of Rs 26,000
crore from direct taxes and a net accrual to the government coffers of Rs 46,500 crore.

In the event, the fresh resource mobilisation is expected to be Rs 20,500 crore.

There are a wide range of proposals to boost agriculture, education and health; a
National Social Sercurity Fund is planned.
Simplification of the foreign direct regime will be attempted and the disinvestment will be
speeded up to increase the public ownership of the public sector enterprises.

The exchequer will be richer by Rs 25,000 crore if this drive meets with success.

Certainly, this is a please-all budget. But the larger picture is still disturbing. In the
current fiscal year, both in regard to revenue and spending, the budgetary arithmetic has
not been adhered to.
Though in regard to direct taxes, the mop up was in tune with expectations, a big
shortfall is anticipated in customs, excise and service taxes. In the light of this, the
targets for 2010-11 seem to be ambitious.

The net tax revenue is slated to rise by Rs 68,911 crore next year. In the case of non-tax
receipts too, an incremental growth of Rs 35,929 crore is budgeted in contrast to a
decline of as much as Rs 28,088 crore in the current year.
As against this, total expenditure is to burgeon by Rs 87,202 crore in 2010-11, with
much of the increase envisaged under the plan category. Non-plan spending is forecast to
go up by a mere Rs 29,286 crore.

This appears to be rather unrealistic. In respect of defence, the budget actually provides
for a lower order of spending under the revenue account - to the tune of Rs 1,096 crore -
while defence capital outlay is to be hiked sharply to Rs 60,000 crore from Rs 47,824
crore.

In the current year, there was capital defence expenditure was lower than the budget
estimate b y Rs 7,000 crore. In this case, a slippage is more than probable; in totality,
defence spending may be more than provided for.

Likewise, the subsidy burden is trimmed in the budget for 2010-11 but, even with the
new fertiliser policy in place, other subsidy may tend to bloat.

Juxtaposing the anticipated revenue and spending projections, the estimates of both
revenue and fiscal deficits may be underestimates. In the event, it is problematic that the
net market borrowings would be limited to Rs 345,010 crore next year. In the current
fiscal, this figure is pegged at Rs 398,411 crore.

With this shaky arithmetic, the budget has not taken the goal of fiscal consolidation
seriously, rhetoric notwithstanding.
Thus, the fiscal policy has not come to grips with the real issues, and a question-mark
hangs over the realisation of thetarget of fiscal deficit-GDP ratio to 4.8% by 2011-12 and
to 4.1% by 2012-13.

But, under the circumstances, the Union finance minister has performed a deft balancing
act - all have something to be happy about and not many may have serious reservations.
A pragmatic budget when seen in context, but not necessarily the one to rave over or be
euphoric about