:: Paranjoy Guha Thakurta

Will FM heighten Monday blues or try to please all?

Paranjoy Guha Thakurta

June.06 : From the time finance minister Pranab Mukherjee last presented a Union Budget a quarter of a century ago, the Indian economy has changed considerably. The licence-control raj may be a thing of the past, but poverty and inequality in the country has not gone down dramatically, certainly not as fast as one would have liked. What is working in his favour this time round is that expectations are rather muted: few are hoping for a big, bang dhamaka Budget with sharp tax cuts, new policy initiatives or announcements of major reforms.

On the contrary, the realisation that the growth rate of the Indian economy has slowed down at a time when the economies of most countries in the world (with the exception of a few like China) are shrinking, has made most expect little or nothing substantive from Monday’s Budget. If that has made the Bengali-babu’s task a little less daunting, what lies ahead of him is a series of challenges that he is expected to confront with his hands metaphorically tied behind his back — indeed, he has no room for flexibility. He may be damned if he does, and damned if he doesn’t.

Consider the fiscal situation that prevailed when Mr Mukherjee presented an Interim Budget on February 16 — if anything, things have worsened since then. The fiscal deficit as a proportion of gross domestic product (GDP) for the financial year that ended on March 31 is up to a level of nearly 6.2 per cent against 2.5 per cent that had been budgeted for when P. Chidambaram had presented the Budget for 2008-09 on February 28, 2008. The size of the fiscal deficit — or the gap between the Central government’s total expenditure and its revenue receipts plus recoveries of loans and other receipts — has itself widened more than two-and-a-half time.

The government’s revenue deficit — which is the difference between the government’s revenue expenditure and revenue receipts (excluding capital transactions) — went up from one per cent of GDP budgeted for to around 4.5 per cent, the deficit itself going up more than four times. This is hardly surprising when one looks at the absolute numbers. The government’s tax collections were down more than Rs 62,000 crores from the target set while its total expenditure exceeded the Budget estimate by over Rs 1,50,000 crores during 2008-09.

In other words, it is clear that no attempt will be made during the current financial year to adhere to the deficit targets specified in the Fiscal Responsibility and Budget Management (FRBM) Act. The last sentence in the very first paragraph of the Economic Survey that was presented on Thursday reads: "Needless to say it is an imperative to return to the FRBM targets for the fiscal deficit at the earliest, possibly by 2010-11 (emphasis mine)". The short point: this is a time for the government to spend and spend a lot without thinking too hard about fiscal consolidation. The problem: even if the deficit is allowed to remain as high as it is or is allowed to rise, a question arises as to where the government will find funds for its ambitious social security and welfare schemes meant for the proverbial aam aadmi who voted the Congress-led United Progressive Alliance government back to power.

It is worth recalling a few other phrases from Mr Mukherjee’s Interim Budget speech made four-and-a-half months ago. He said that "in the days of financial stress, tax rates must fall and our ability to pay taxes must rise". He also stated: "We are going through tough times" and remarked that "current indications of the global situation are not encouraging". He had also remarked: "Extraordinary economic circumstances merit extraordinary measures", adding immediately, "Now is the time for such measures".

What could some of these extraordinary measures be and what will the finance minister’s strategy be to garner more money? Given the ongoing economic slowdown and resource crunch, it seems unlikely that Mr Mukherjee will slash taxes at this juncture. In fact, higher taxes — especially direct taxes — cannot entirely be ruled out though it would obviously make the vocal urban middle classes unhappy and may suppress spending by these sections.

There are huge demands on the finance minister to spend more, especially on the proposed National Food Security Act that envisages providing a minimum of 25 kg of rice or wheat a month at Rs 3 a kg to each family living below the poverty line by strengthening and revamping the public distribution system that is in a rather decrepit state in many parts of the country. What is more, Congress president Sonia Gandhi has written to the Prime Minister suggesting that the scheme be expanded to include the urban poor, single mother-headed families among other sections of the underprivileged.

Funds would be raised by divesting the government’s shares in profit-making public sector undertakings and by auctioning third-generation electro-magnetic spectrum. Through these two avenues alone, an extra amount of Rs 50,000 crores could be raised during the current financial year. The problem is simply that these are not recurring, but one-off sources of raising money. It would be tempting for the government to use the funds to bridge the deficit. But that would be just the wrong thing to do. Divestment would be politically acceptable and economically sustainable if the proceeds obtained from selling assets that belong to the people of India are used for building the social infrastructure (healthcare and education), for revamping PSUs or even, retiring public debt.

In a sense, Mr Mukherjee’s work is cut out for him. He can afford to displease the chattering classes and not do away with the FBT (Fringe Benefit Tax), the DDT (Dividend Distribution Tax) or the STT (Securities Transaction Tax). If he, instead, tries to please all sections, there is a danger that he will end up spreading the happiness so thinly that nobody will be happy. Wait for Monday.

Paranjoy Guha Thakurta is an educator and commentator based in New Delhi