By Zainab Lokhandwala, Intern, TIE)
Man has reached the moon, he has deciphered the great mysteries of the universe, time and space, and he has built near-impossible architectural marvels and much else. Yet when it comes to economics and finance our politicians try hard to convince us that these things are beyond the realm of human understanding. That is why many among us gear up to try to comprehend the Union Budget and prove all of them wrong; some among us are able to grasp its crux yet most of us fail. Thankfully, the Finance Minister made it easy for all of us this time. Why so, because not only is the Budget a shining beacon of bad and senseless economics, it is also just simply a result of bad and senseless politics. All of which is so jarring that those among us who ducked low during intense Budget discussions at the nearby chai ki dokan(tea shop) can now hold their heads high and deliver a substantial opinion or two over the subject.
This was the UPA-IIs last opportunity to present a Budget before the general election next year. Ideally we all expected a Budget meant for the voter who will in less than a year walk to a booth in order to decide the fate of the nation. For starters the Finance Minister has devoted all his attention to containing the fiscal deficit by curtailing it to 5.2% of the GDP by the end of 2013. This has resulted in a severe cut in public expenditure; that is, if on the one hand the government has tried to reign in its deficit it has not balanced it with expenditure required for a 13% GDP projection. Here is where the UPA has continually failed Budget after Budget. Secondly, the Finance Minister has reduced crop, fertilizer and petroleum subsidies; hence there will be no respite for the farmer in the near future. In areas where the subsidies have been increased, the government has done so stingily. For example, food subsidies have been increased from Rs 85,000 crore in 2012 to Rs 90,000 crore this year. Most of the increased amount will be exhausted due to rise of food prices. What has consequently resulted is that there is no stimulus to reverse the slow-down. In fact, cuts in expenditure realised by cuts in subsidies can be a cause for further inflation.
Thirdly, coming to the point of taxation; the Finance Minister has achieved something commendable by imposing a 10% surcharge on individuals and corporations which have a taxable income exceeding Rs 1 crore. However, the impact of this initiative is going to be nearly negligible. The Finance Minister himself stated in his Budget speech (among a great deal of irrelevant trivia) that only 48,200 persons qualified to pay the surcharge. Expectantly, the tax to GDP ratio (current ratio: 10% is very low compared to the developing countries mean ratio) has risen by only half a percentage point. What ought to have been done while cutting down expenditure is the attempt to mobilise additional taxation recourses. In 2007-08 the tax to GDP ratio was at an all-time high: 11.98%. Achieving this target should have been an objective which would have been the balancing factor between reduction in public expenditure and high growth projections. The Finance Minister did address this issue in his speech by stating that revenue was to rise by 19% owing to a 17% rise in corporate taxes, 20% rise in income taxes and 36% rise in service taxes. However, it is important to note that in the case of high-income individuals and corporations paying of taxes have only been restricted to the 10% surcharge and not a general rise in rates. For the rest, as growth is not projected to increase by the end of this year, there is scepticism as to how much revenue will this scheme churn out anyway.
Fourthly, the Finance Minister has sought to double miscellaneous capital by projected increase in divestment and high returns in spectrum sale. However, this is an exaggerated estimation considering the present state of the markets and policy confusion regarding allocation of spectrum etcetera. Fifthly, measures like deregulation of petro-product pricing, cost-plus pricing of power, dynamic fuel-price adjustment prior to the passing of the Budget throw light on a policy drift toward cut in public expenditure. In India economic and financial gurus often attribute Indias growth recovery after the international slow-down to a tight monetary policy adopted by the Reserved bank of India (RBI) in response to a striking increase in inflation. The government ought to focus on an easy monetary policy along with individually assessing and addressing problems like inflation and current account deficit.
Lastly, the adherence to such a policy makes no political sense before an election either. The divide between the Congress party leadership which exercises party-power and controls electioneering and that part of the party which is responsible for governance seems more pronounced. You may be tempted to draw yourself to the debate regarding how the group of people who run the Ministry are not responsible to the Houses of Parliament and the group of people who are responsible do not run anything. Which way the election goes may just be the next topic of discussions in numerous chai ki dukans(tea shops) in India yet what is clear from the 2013 Budget is that the UPA could have done much more economically and politically which it has in fact failed to do. Here was a blatant example of an opportunity which remained untaken and arguably an entire electorate which remained unhappy.