Taking advantage of strong revenue buoyancy, the finance minister has been able to meet his political objectives in this election year without violating either basic economic fundamentals or FRBM targets. If this is not a virtuoso performance, I wonder what is.
The Budget promises to bring down the fiscal deficit to 2.5% of GDP next year, which is lower than the FRBM target by a full 0.5%, and estimates the revenue deficit to come down by 0.5% this year as required by the Act. For the puritan, the inability to achieve the revenue deficit target is clearly a weakness. But even here, it?s somewhat difficult to argue that in a year that the external environment is turning less benign and external demand beginning to slacken, the FM should not have used the extra revenues for stimulating domestic demand and sustaining the growth momentum.
However, off-Budget expenditures, which the FM acknowledged, can amount to about 1.5-2.0% of GDP. These include interest on oil, food and fertiliser bonds. Taking these into account, the fiscal deficit FRBM targets will also not be met. This is worrying.
The cut in central excise duties from 16% to 14% and raising of exemption limits for personal income tax will help boost domestic demand. The 100% waiver of loans for small and marginal farmers is, of course, the piece de resistance of this Budget, and I cannot see any worthwhile opposition to such a measure that will help both growth and equity. The sum involved, Rs 60,000 crore, is unprecedented.
The FM would have done even better if he had clarified how this waiver will be financed. I am certain that this will come out of the Budget. But the reaction of the stock market, with bank stocks having taken a serious beating on this announcement, seems to indicate that investors believe this cost may be borne by the concerned banks themselves.
The Budget has a couple of structural innovations which I hope are not lost in all the noise on loan waivers and tax cuts. I refer to the pilot scheme for the use of smartcards in delivering food subsidies in Haryana and Chandigarh, and the establishment of the Central Plan Schemes Monitoring System. The former, if successful, can truly be a historical turning point in the delivery of subsidies. The latter is the first real step that the FM has taken for achieving better outcomes which he has been emphasising since taking office.
The market stabilisation scheme (MSS) that is estimated to cost about Rs 8,351 crore is very small compared to all other budgetary subsidies, and should be used even more aggressively to support manufacturing output and exports.
The FM should have come up with more incentives to raise R&D spending by corporates to promote innovation. It is time we recognised that achieving double-digit manufacturing growth and boosting manufactured exports further is the most effective measure for absorbing labour being released from agriculture. In this regard, the continuation of incentives for textiles, handlooms, powerlooms, handicrafts and micro enterprises is welcome. However, the rationale for providing capital subsidies (for example, in textiles) and not provide employment- linked incentives to induce greater labour absorption has never been clear to me.
The corporate sector, though apparently a bit miffed, has really no cause to complain, given the measures taken to raise domestic demand. So, overall there does not appear to be any class or group of people who could be unhappy with this Budget. This is an amazing achievement for any FM.
?The author is director, Icrier, and member of the National Security Advisory Board