Union Budget 2010 - Realistic and Conscious

Pranab Mukherjee in the Union Budget 2010 has treaded a balanced path. In the beginning of his speech, the Finance Minister, as a welcome change, has delivered clarity on the policy priorities by outlining the three challenges confronting the government (i.e. achieving double digit growth, inclusiveness and public delivery reforms). Emboldened by the recent upswing in the growth/consumption numbers and away from the clutches of cynical political partners, the government seems to have garnered fortitude by recognizing in the budget that “an enabling Government does not try to deliver directly to the citizens everything that they need. Instead it creates an enabling ethos so that individual enterprise and creativity can flourish”. This is a lucid signal that government is serious on its public-private partnership initiative.

This budget has got its fair share of some good and some not so good programmes. The government’s proposal to target an explicit reduction in its domestic public debt-GDP ratio, though only in principle, is a welcome initiative. This disciplining process will go a long way, in bolstering the confidence of foreign investors and enabling a sustainable macroeconomic environment. The fiscal deficit for 2010-11, pitched at 5.5 % of GDP, remains a lofty figure; however, it is nevertheless a reasonable start towards greater fiscal prudence.

Rationalization of Fertilizer subsidy scheme, transparency in subsidy accounting and simplification of the FDI regime are encouraging signs. Similarly, expanding banking facilities to reach every habitation having population in excess of 2000, by March 2012, is pragmatic and commendable project. The Technology Advisory Group for Unique Projects, which has a potential to improve the efficiency of public projects, and the ambitious mission to reduce legal backlog in courts, from an average of 15 years to 3 years, by 2012 are laudable.

The ‘People’s Ownership of PSUs’ is a well meant program. However, the recent National Thermal Power Corporation Public Issue episode hark backs that the disinvestment process, though smart in its intent, should be cautiously managed.

The apex-level Financial Stability and Development Council proposal might end up over crowding the regulatory space. Instead, the government can aim at consolidating the existing financial regulatory structure, by clearly defining the spheres of business of existing regulators, and then build an umbrella system with an apex body to rule on over laps and plug loopholes.

It’s a pretty bleak picture on the agriculture front. Although there is a four-pronged strategy outlined in the budget, the allocations to the sector remain far from inspiring confidence. The only ‘element’ which spawns hope is the decision to establish fifteen mega food parks for the development of the food processing sector. The inflation adjusted allocations to health, education and MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) are also not encouraging.

In the direct tax proposals, the tax slab revision deserves kudos as it helps middle classes to spend or save more; either of which is good for the growth numbers. The allowance of an additional Rs 20,000 under 80C (I T Act, 1961) deduction would encourage middle classes to channelize their savings into much needed infrastructure investments. The upward revisions made in R&D weighted deductions, rationalization of 44AB (IT Act, 1961) threshold limits would also prove strategically beneficial.

On the indirect taxes front it is a pity that the major objectives that have guided the formulation of proposals, mentioned in the budget speech, are only “the need to achieve some degree of fiscal consolidation without impairing the recovery process and moving forward on the road of GST”, and not the espousal of equity principle of taxation. For the first time in many years, the government has consciously steered its tax policy to offset a loss in Direct Tax revenues by an almost double gain through regressive Indirect Tax revenue. This development is most definitely not synchronous to the ‘AAM ADMI’ agenda.

This Budget like many of its predecessors has got a mixed bag appeal. However, what makes this budget special is that, it indicates, there is a growing consciousness, in the policy making circles, towards modeling realistic policy ambitions.