Despite the cricket extravaganza, the Budget presentation by the Union finance minister this year was full of media hype. After reading the Economic Survey, people expected that the Budget would contain measures to control inflation and provide relief to the people suffering from it, achieve fiscal consolidation, augment infrastructure to maintain the growth momentum, undertake measures to augment agricultural output, revamp subsidy regimes, liberalise the higher education sector and open up foreign investment in retail trade. Surely, all these policy changes need not be pursued in the Budget and hopefully some of these will be taken up during the course of the year. Indeed, the middle class taxpayers, particularly those on the verge of retirement and the really elderly, were pleased with the increase in the exemption limit. But there are larger issues in the Budget that needed to be addressed. It was important for the Budget to address the issue of fiscal consolidation, enhance allocation to infrastructure spending to accelerate growth in agriculture, maintain growth momentum in manufacturing and services, and undertake tax reforms in keeping with the objective of implementing DTC and GST.

On the face of it, the government?s performance in bringing down the fiscal deficit in 2010-11 from the budgeted level of 5.5% to 5.1% in the revised estimate is commendable. However, credit for this should go to the revision of GDP by the CSO just a few days earlier. Had the government limited its deficit at the budgeted level in absolute terms, the GDP revision alone would have resulted in the deficit being reduced to 4.8%. In fact, the deficit in 2010-11 increased by R19,590 crore over the budgeted amount, pushing the fiscal deficit to 5.1%. Interestingly, even as the spectrum bonanza yielded over R72,000 crore more than the budgeted amount and buoyancy in the economy, including a high rate of inflation, resulted in higher income tax revenue collections to the tune of R25,950 crore. And much of this was used to pay additional subsidies (R48,000 crore), pensions (R11,000 crore) and reduce the disinvestment amount (R18,000 crore).

The finance minister, while presenting the Budget, invoked Goddess Lakshmi and he surely needs to if he has to adhere to the fiscal targets in 2011-12. The basic assumptions involved in setting the fiscal deficit target at 4.6% is that the central taxes should grow at 18.5% and the expenditure growth will be contained at 3.4%. This assumes tax buoyancy of 1.32 as the nominal GDP is assumed to increase at 14%. This may not be unrealistic, given the recent trend. What is, however, a matter of concern is the feasibility of containing the expenditure growth at 3.4% in nominal terms. This requires the growth non-interest expenditure to be contained at 1.4% and non-interest revenue expenditure to be contained at 2%. In some cases, the expenditure is supposed to decline in absolute terms and this is particularly true of subsidies (R20,583 crore) and non-plan expenditure on social services (R14,200 crore). Recent history is replete with instances of expenditure exceeding the Budget estimates by large amounts, casting serious questions on not only the credibility of the Budget but also its strategy of expenditure implementation and management.

A major item of expenditure proposed to be compressed in 2011-12 is on capital expenditures. In contrast to the Finance Commission?s target on capital expenditure set for the central government at 3.1% of GDP, the Budget proposes to reduce capital expenditures from 2.1% in the current year to 1.8% in 2011-12. In fact, the proposed capital expenditure is lower than the current expenditure even in absolute terms by about R2,300 crore! Analysis shows that in six key infrastructure sectors, namely power, coal, railways, highways, shipping and petroleum & natural gas, the capital expenditure has been stagnant at 0.57% of GDP for the last 3 years and the budgetary contribution to investment spending in these sectors is just about 21%, with 79% coming from internal and extra-budgetary sources of public enterprises. This surely does not bode well for maintaining growth momentum. In the agricultural sector, where there are serious concerns about stagnancy in production and poor storage & marketing infrastructure, there have been hardly any worthwhile initiatives. It would be heroic to expect that a second Green Revolution can be achieved by spreading R300 crore on a number of schemes in the agricultural sector.

Another important initiative expected from the Budget was on tax reforms. Withdrawal of exemptions on 130 commodities for excise taxation is a welcome measure and hopefully the government will bring in the additional 240 items when the GST is introduced. It was widely hoped that the government would take measures to reform its excise duty regime to unify the tax rates by converting the specific rates into ad valorem and converging the rates. Yet another opportunity to convert the specific duties into ad valorem in the case of cement, for example, has been missed. Similarly, it was hoped that the government would expand the base of service tax by extending it to all services with a small negative list. This would not only have expanded the tax base significantly but also have facilitated the transition to GST. Contrarily, there is some tinkering in the rates that do not have implications for GST in the case of excises and continuation of selective taxation in the case of services. In fact, the approach of taxing all services with a selective negative list would have avoided the controversy on taxing services like nursing homes. There is certainly a case for taxing nursing home services because that could provide additional money for making more allocation to health care. However, it is not clear why only non-government nursing home services with more than 25 beds having central air conditioners should be taxed and not all nursing homes! Similarly, it does not make sense to distinguish between branded and non-branded items while taxing readymade garments once the threshold for taxation is decided. This type of tax policy calibration only leads to significant resource distortions. Once the threshold for taxation is determined, why can?t all nursing home services be taxed?

The author is director, NIPFP