Pranab Mukherjee?s Budget speech had its share of frank confessions. No I am not referring to the quote from Hamlet. That part is still up to the jury. In spite of his warning he has not been terribly cruel, having not done anything that was not widely predicted by the media?the service tax raise included?and how much long-run kindness this involves, well, only the long-run can tell. But he was honest about the part about the FM?s life being difficult. But as they say, it ain?t easy but somebody?s gotta do it.
Let the records say Mukherjee at least tried. The challenges were many?with the breach of the FRBM ceilings, the challenges of the subsidy bill, the necessary boost to industry to take us to 9% growth levels. He took the middle path and let convenient assumptions take care of the rest.
Take the subsidy issue, for instance. With two years to the polls, dismal recent electoral records, and more importantly the Sonia Gandhi-headed NAC itself going for the Right to Food Security, Mukherjee had no other choice but to adopt it. What ?fully provided for? means is for interpreters to figure out because according to the independent cost estimates, this alone can bankrupt the government. As for others, plugging leaks would bring about necessary savings to keep the bill to below 2% of the GDP. No one can doubt the intentions here, but with Aadhar coverage at 20%, though moving at a fast clip, do we really have the capacity to do this in a year?s time?
On the revenue side, expansion of the service tax net as well as the raising of rates was much anticipated. Industry is unhappy with the withdrawal of excise tax reductions, but we are yet to hear an industry lobby ever say it is the right time to raise taxes. For them, it is always the right time to cut subsidies. So nothing wrong there, except that if we really think the industry needs a shot in the arm to raise our overall growth rates, there is little there. That a widespread service tax can spur an inflationary cycle is not too far-fetched an idea either. But then, it probably had to be tried.
The ECBs have figured prominently in this Budget as a planned source of funding for industry, particularly for much needed infrastructure. Fine in principle, except that the funds may not exactly be gushing in from foreign banks and too much of foreign borrowing will have its effects on the stability of the currency.
It was heartening to hear that the Financial Sector Legislative Reforms Commission is ready with a bevy of new laws to be introduced in the current year. If these laws actually get passed, the financial sector can really change dramatically. But then, again, there is little in UPA-2?s legislative achievements to make that a reasonable assumption.
Overall, a great balancing act. But then projections usually tend to balance much easier than reality. It will be very interesting to watch the revised estimates for all these figures a year from now to see how close they are to the estimates today. The success or otherwise of this Budget will rest on execution and that?s where doubts arise, given the government?s record so far, even without any adverse global movements.
The author teaches finance at the Indian School of Business