What A Middle-Class Act! Fiscal Health Gets A Booster Shot

IT'S A MIDDLE-OF-THE-ROAD BUDGET, neither harsh nor soft, neither left nor right. Finance minister Pranab Mukherjee is neither a populist nor radical reformer. Curbs on non-Plan spending rather than stiff taxation (net additional taxes are barely Rs 20,000 crore) will reduce fiscal deficit to 5.5% of GDP next year, with further reductions to 4.8% and 4.1% in the next two years. 

    This conforms to the targets of fiscal consolidation in last year's budget. Banks are relieved that they will be able to fund the reduced borrowing requirement of the government. Disinvestment of public sector shares will fetch Rs 40,000 crore, and the 3G spectrum auction another Rs 35,000 crore or so. 
    This exceeded the markets' low expectations, and the Sensex zoomed 175 points. Reliance Capital was a top gainer, after the finance minister's statement that more private sector banking licences would be given out. 
    Conditions today were good for a reformist budget. Only one state election (in Bihar) occurs this year, and the current coalition partners lack the muscle to topple the government unlike the Left Front in the 2004-09 coalition. 
    But Mr Mukherjee avoided any significant reforms. FDI could have been allowed into retail and the FDI limit hiked in insurance; foreign investors could have been given voting power in line with their bank shareholding. 
    The budget assumes 8-8.5% real growth and 4% inflation, giving 12.5% nominal GDP growth. This very optimistic scenario assumes that the global economy will not slow down. If it does, all bets on deficit reduction are off. 
    The surcharge on corporate tax has been cut from 10% to 7.5% while the minimum alternative tax (MAT) has been raised from 15% to 18%. This will raise the overall effective tax rate. The tax break for software parks has not been extended, so the likes of TCS will now be taxable, but for the refuge they get in SEZs. 
    The aam aadmi will get more rhetoric than cash: NREGA gets just a marginal boost to Rs 40,100 crore from Rs 39,100 crore last year. The fiscal stimulus was rolled back very partially. Cenvat went from 8% to 10%, well short of the pre-stimulus 14%. Cenvat and service tax now stand unified at 10%, preparing for the transition to a single-rate goods and services tax next year. 
    Import and excise duty on crude and petroleum products were cut in 2008 when crude hit $112/barrel, and these cuts have been reversed in the budget. Petrol and diesel will go up in price by Rs 2.67/litre and Rs 2.58/litre, respectively. But petrol and diesel prices remain to be decontrolled. 
    The Economic Advisory Council recently said the fiscal stimulus comprised accelerated spending much more than tax cuts, suggesting that the rollback should focus on spending. Mr Mukherjee has followed this advice—non-Plan spending is up only 6%, and non-Plan outlays are actually down for several sectors, including defence, subsidies, police, economic services, social services and other general services. Plan spending is up 15%, a desirable trend change. 
    The middle class will be angry with the rise in petrol and diesel prices, and Mr Mukherjee has sought to mollify it with a widening of incometax slabs, which will provide some relief. But inflation remains a major concern, and the budget hope that inflation will fall to 4% over the next year is a triumph of hope over experience. CORNER ROOM

MUKESH AMBANI

SUNIL MITTAL

NARAYANA MURTHY

AZIM PREMJI

KUMAR BIRLA

MARK MOBIUS

ARTIST AVA NAGPOREWALLA 
• CLASS IX 
• SCHOOL BAF PETIT, MUMBAI