Budget Special

New Delhi, 17 March 2012

Budget Proposals

UNWISE & ANTI-POOR

By Shivaji Sarkar

The Union Budget is a confusing text of socialistic principles being implemented in a supposedly market-dominated economy. It has hit out at consumerism-- the mainstay of the market and has pulled out every sop to increase prices of each commodity. If this is the step to contain inflation, it is bound to be counter-productive as excise duty and service tax increase of two per cent would effectively lead to at least seven per cent rise in inflation.

The proposals put almost Rs.1,00,000 crore additional burden on the people – Rs 45,000 crore through taxes and another Rs 55,000-odd crore through indirect measures. Virtually everything under the sky has been brought under the service tax ambit. No transaction remains untaxed and the decision appears to continue with imposing a double tax for the “follies” of the people trying to put a little savings in banks for their old age. In short, it taxes even the social security benefits.

The budgetary measures would further hit growth and expectation of it going beyond 6.9 per cent should remain a pipedream. Instead of the tokenism shown in I-T exemption, it would have been better to abolish I-T at least up to Rs 10 lakh, to balance with what the Finance Minister says his “cruel steps”.

Clearly, the Budget has hit out at the culture of savings, a crucial aspect that has fuelled India’s development. No wonder savings rate is reaching a critical stage leading to a liquidity crisis with the banking sector. Reducing interest rate on interest rates of Employees Provident Fund (EPF) is yet another blow. In short, the budget instead of being visionary – the need of the hour – lacks political wisdom. It appears Pranab Mukherjee, known for his political wit, has succumbed to a bureaucratic driven path.

This year's Budget could have been an instrument of growth if he had addressed the key challenges facing the Indian economy. But the Budget did not venture in that direction and continued to reflect indecision and confusion on the economic front.

The nagging fear is that the country would face high inflation. Till February 2010, it was at 20 per cent. The pre-budget projections were that it would increase by 7 per cent.  With the budgetary proposals, double digit inflation is almost certain. It would further reduce purchasing power capacity leading to low demands in industrial, manufacturing and all other activities, including eating out. More restaurants may close down.

This goes against the FM’s stated 12th Plan objective of “focus on domestic demand driven growth trajectory”. Nor his objective of high growth in private investment, seen tapering off during the last three years due to high inflation, interest rates and other uncertainties; is achievable.

The FM says he wants to address bottlenecks in agriculture, energy and transport – coal, power, highways, railways and civil aviation. His step in asking Coal India to sign fuel supply agreements is inappropriate as coal reserves are reaching a critical stage. On energy there is no perspective. With conventional energy sources such as coal and gas dwindling, the thrust on alternative energy research remains absent. It might put a brake on the 12th Plan. The private investment and partnership he is looking for in many areas, including defence may be difficult to materialise.

This apart, the FM has given many concessions to the airline industry, including duty-free import of fuel and spares. Beyond his budget he has expressed steps to bail out loss-making Air India. Now he wants to limit FDI in aviation sector to 49 per cent. It is absurd. He puts public money in a loss-making sector. He should allow 100 per cent FDI in aviation and consider leasing out Air India to save public money and punish the bureaucrats who had led it to bleed. It is futile to pump in money in the loss-making airline while offering to sell the silver in Maharatna PSUs. The loss is to the revenue earnings in both the cases and certainly not a wise decision.

The free import of aviation fuel and spares is a direct subsidy of over Rs 1 lakh crore a year to the richest while the FM rues giving subsidy to the poor. Such subsidy is limited to Rs 190,000 crore, including supposed petroleum subsidies, which are never paid to the petroleum companies. Actual subsidy to the poor, if at all, is limited to Rs 1 lakh crore – a beautiful balancing of the richest and the poorest!

Fiscal deficit – borrowings - in 2011-12 reached 5.9 per cent and now it pegs at 5.1 per cent –likely to go beyond 6.2 per cent in reality. It is very high. Total government debt has reached 45.5 per cent of GDP, the FM says.

This should cause concern. Greece also started its downhill journey a decade back with that level. The FM also does not say a word about reducing expenses on government departments. It is budgeted at Rs 9.69 lakh crore, 18.8 per cent increase, in a total budget of Rs 14.9 lakh crore – two-third of the total expenses.

Importantly, the Finance Minister has disappointed the agricultural sector too. There is no follow-up on Swaminathan Commission’s recommendations to rescue the farmer from distress. Injustice has been done to the farming community on crop loan interest rates. How can one expect the farmer who is in neck-deep debt to repay loans on time to avail interest subvention? The steps are more cosmetic. Increase in farm-loan availability to Rs 5.75 lakh crore is impractical. Even last year they did not take 50 per cent of the Rs 4.75 lakh crore made available to them.

It is surprising that while the FM has decided to increase customs duty on a number of items, including bicycles, he has not taken any step to put an end to Chinese dumping of goods manufactured by electronic, electrical and small and medium industries sector. It is time he acts against China as having lost western markets, China is aggressively targeting India.

The focus on health is, however, good. But more emphasis should have been laid on medical education. Health targets without affordable medical education are difficult to achieve. In all, the Budget needs many corrections. And one cannot help but keep the fingers crossed that he would make the requisite amendments to make it more people and growth oriented. ---INFA

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