Shaleen ShahThe interim budget presented on Monday by the acting finance minister Mr. Pranab Mukherjee lived up to its billing as a poll-eve document listing UPA government’s track-record on the economic front in the last five years.
However, with propriety as his hackneyed watchword, the FM however, failed to address the people’s concerns on two critical areas — the increase in unemployment, because of the job-cuts in these times of economic downturn, and the burgeoning revenue and fiscal deficits.
The following is our Note on the Misses in the Interim Budget:
- No tax relief for industry or individual taxpayer now.
- No Indication about the roadmap for introducing GST from 2010 or 1% CST Rate cut w.e.f. 1-4-2009.
- No Indication regarding continuing the excise duty cuts into the next financial year.
- Government is yet to take a view on whether to extend the existing CENVAT rate of 10% beyond March 31. However the good news is, as per one interpretation, the government notification making the rate change effective does not lapse on March 31, 2009, unless the government issues a fresh one withdrawing the duty cut, which is unlikely ahead of polls.
- No indication to extend the tax incentives under the software technology parks of India (STPI) scheme beyond 2010.
- The 2% interest rate subvention of pre- and post-shipment credit for traditional export sectors like textiles, leather, gems and jewellery, marine products and small and medium enterprises, which was due to expire on March 31, will be extended only up to Sep 30, `09.
- No stimulus for bleeding sectors like Real Estate, Banking, etc.
GDP Growth
The Financial Ministry officials clarified that the Budget numbers for 2009-10 have been made on the assumption of a nominal GDP growth rate of 11% as against 13%last year. “We expect the GDP growth rate to be close to this year’s, which is expected to be near 7%. Factoring in inflation of 3.5 – 4%, the nominal GDP growth rate would be close to 11% said the finance ministry official.
Fiscal Deficit
For 2008-09 the shortfall in tax collection, taking both direct and indirect taxes, is expected to be about Rs.60,000 crores.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-Budget items like dues to oil and fertiliser companies. Add another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However as per the FM, at a time of deep recession, this should be seen as an economic stimulus rather than profligacy. The government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. The FM said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism — for example, farm loan waivers — has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages in Dec `08 & Jan `09.
For 2009-10, the Budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment.
Hope but no hope!
However, at a post-Budget press conference, the finance secretary said that after all, the interim budget was only one of many instruments at the government’s command. The two stimulus packages already announced, first in Dec `08 and the second in Jan `09, had launched anti-recession initiatives in several sectors, he said, and more would be done, as and when necessary.
But, four months of inaction till the new government takes over, at a time when the economy is slowing, is a cause for concern as many companies could face irreparable damage.
[Author: Shaleen Shah (Partner), VNCA]
