Budget Analysis 2009-2010

Pranab “gambles with big stimulus,” “borrows to fund handouts;” “Rs. 1,86,000 crores is the fiscal stimulus in 2008-09.” “A House for Commons.” This is how the media, both print and visual, had headlined the budget for the year 2009-10 as a growth-spend model. The media once again seems to have been misled by the Finance Minister’s budget speech. This is despite the fact the almost all budget speeches in the past had in variably concealed the real story in the budgets. This time the media may have been misled into believing all that Pranab Mukherjee had said because he had begun his budget speech very differently.

Most Finance Ministers craft their budget speeches as if their speech and their budget would decide the fate of the nation’s economy for all time to come. But, when almost at the opening of his budget speech, Pranab Mukherjee said that “a single budget speech cannot solve all our problems, nor is the union budget the only instrument to do so,” he looked totally unlike most of his predecessors. This had perhaps raised the hope that, in other respects also, his speech and the budget would be more transparent and less sneaky. But when he ended his speech it seemed the same old story. And more, when the numbers hidden deep inside hundreds of pages of the volumes were scanned, it became clear that Pranab’s budget was clearly as sleight as his predecessors’. Take a core statement of his speech, namely, that the fiscal deficit overrun from 2.7 per cent to 6.2 per cent of the GDP in 2008-09 amounted to Rs. 1,86,000 crore and that the difference of 3.5 per cent was the “total fiscal stimulus package” in the form of “tax relief to boost demand” and “increased expenditure on public projects” to “counter the fall out of the global slowdown on the Indian economy” (paras 13 and 14 of the budget speech). This statement is only 1/3 true; and 2/3 of it is lie. The numbers speak.

By looking at a single sheet in the Revenue Budget (p1) and another sheet (p10) in the Expenditure Budget, a first year B.Com student can show that, out of the proclaimed “stimulus” of Rs. 1,86,000 crore, over Rs. 1,30,000 crore — that is more than 2/3 — consist of fall in Income tax collections (Rs. 20,000 crore), 6th Pay Commission dues (Rs. 40,000 crore), fertilizer subsidy (Rs. 45,000 crore), food subsidy (Rs. 11,000 crore) farm debt waiver (Rs. 15,000 crore), and extra interest on borrowings (Rs. 2,000 crore). None of these items is related to the “stimulus.” The fall in income taxes is due to the meltdown; not to counter it. And the overrun spend in revised estimates for debt waiver, 6th Pay Commission, and subsidies are mere short provisioning in the 2008-09 budget! The explanations in page 10 of the Expenditure Budget make it clear. Even if the global melt down had not taken place these extra expenses would have to booked in the budget. Only the fall in excise and customs collections (Rs. 40,445 crore less 30.5 per cent due to the States) of Rs. 28,000 crore, and plan expenses (both capital and revenue) of Rs. 40,000 crore — totalling Rs. 68,000 crore — could be related as stimulus. But, here too, if the 0.5 per cent negative growth in manufacturing and fall in the growth of imports by half in the later part of 2008-09 are reckoned it may well be fall in revenue due to meltdown rather than the stimulus to counter it.Does not counter slowdown

Looking at the current year also, the perception that the finance minister has attempted to spend his way through to counter the meltdown is clearly wrong. Out of the extra spend of Rs. 1,20,000 crore proposed in the 2009-10 budget over the previous year, Rs. 44,000 crore is again on account of 6th Pay Commission dues; Rs. 33,000 crore for extra interest; Rs. 10,000 crore for non-plan grants to states; Rs. 10,000 crore for contribution to IMF and loans to PSUs; these add up to Rs. 97,000 crore. It is only because of the fall in fertilizer subsidy and allied items by Rs. 29,000 crore, this gross extra spend gets reduced to Rs. 78,000 crore. Not a single rupee out of this is stimulus to counter the slow down. It is only the plan allocation of Rs. 42,000 crore, that includes the extra provision of Rs. 25,000 crore additional for NREGA, that passes off stimulus. So much for the Finance Minister’s grandma story on the stimulus impulse in the budget. Further behind the finance minister celebration of the rise in non-tax revenue by a huge figure of Rs. 46,000 crore lies concealed the anticipated sum of Rs. 35,000 crore from auction of 3G licence spectrum! Why does he not say in his speech that this is what the big rise is about?

The Finance Minister is explicit that this budget has nothing to do with either the reform economics of the Prime Minister and the previous finance minister. He has ruled out finance sector reform so passionately insisted by both of them every time an opportunity arose. In contrast he has (in para 38) recalled the nationalisation of banks by the former Prime Minister Indira Gandhi 40 years ago and glorified it as wise and visionary. By saying that banks and insurance will continue to be in the public sector, he has hedged against any effort to undo it. So at one stroke the Finance Minister has shredded the Economic Survey which had predicted a gung-ho reform budget. There is not a word in his speech about the far-reaching financial sector “reforms” the Survey commends at pages 30-32 (boxes 24&25) which included the passing of the banking regulations bill; hiking FDI in insurance to 49 per cent; permitting 100 per cent FDI in select insurance companies; allowing FDI in retail; in defence industries and so on. This budget has virtually outcast the Economic Survey, making it explicit that the Survey had nothing to do with the budget exercise.

Yet, the Survey had whetted the appetite of the stock market. But the budget has shut down the party for the market. The result: the market is down by some 1,000 points since the budget was unveiled. See how the market reacted. When the FM touched his measures to weaker sections, the Sensex was down by 137; by the time he had completed the social sector exposition, it was down by 245; when spoke of tax reform and tax code, it had slid by 340; when he announced the surcharge cut it was down by 420; when he announced the abolition of FBT, it recovered back 50 lost points; when the rise in MAT was announced it was down by 400 plus; by the time he completed the direct taxes exposition, it was down by almost 500 points; when he ended the indirect tax proposals, the fall was over 700; when he ended the speech the fall topped 750 points. This proves that the stock market in India is a traders’ market; not an investors’ market. The traders react only to what they get directly. This budget gives them nothing directly contrary to what the Economic Survey had indicated.

QED: Yet, given the unenviable state of the national economy and the crisis in the global markets, the Finance Minister has not done a bad job. His mistake was that he was too keen to show that he had done a great job. That did him in. Great expectations were created which the budget could not fulfil. The Finance Minister could have been transparent. He need not have ornamented this budget at all. As a leader who has declared that this is his last term in Parliament, he could well have taken the country into confidence about the economic mess; and asked all sections of the people to endure some hardship to help the nation to overcome the crisis. But that calls for a different leadership which no party in the country seems to possess.