Monday, February 23, 2009

Interim Budget: A Brief Overview

A few days ago, the Union Government announced the Interim Budget 2009-2010. This post seeks to briefly highlight some of the important issues it raises.

The long title of what is usually the year’s-most-awaited legislation – the Finance Bill – set the tone of the budget. The Finance Bill, 2009, is stated to be a bill “to continue the existing rates of income-tax.” That may well sum up the interim budget itself – hardly anything new was announced; and the budget speech was more or less a listing of the achievements of the UPA government. Due to this, the budget evoked reactions of disappointment from several industry commentators.

One reason for this lack of fresh inputs may be that general elections are around the corner; and propriety would demand that no major decisions are taken so soon before a new government is formed. As this article notes, “With elections around the corner, fairness demands that the government desist from making announcements that will target narrow constituencies. The UPA government has correctly announced nothing of importance in the `Interim Budget 2009-10' speech. While we live in an exceptional macroeconomic environment, fairness in elections is even more important than macroeconomic stabilization. The UPA can and should chip away at economic policy reform - but only in areas that are invisible to voters.” Given this, it is understandable that the budget does not seek to initiate anything.

More important, however, was the Finance Minister’s description of the state of the economy. The budget notes that the fiscal and revenue deficits are down to 2.7 percent and 1.1 percent respectively for the period 2007-2008. The GDP growth rate is around the 7% mark in the current year. FDI inflows in the period April-November 2008 were US$ 23.3 billion. This represents a growth of 45% over the corresponding period in 2007. Exports have also picked up considerably in this period.

While this appears to paint a relatively solid picture, particularly considering the impact of the global slowdown, at least a few areas do appear to be worrisome.

Here is an extract on the subject of subsidies from the Medium-term Fiscal Policy Statement released by the Government:
“This year has witnessed unprecedented rise in the subsidy bill of the Government. Provision for major subsidies on food, fertilizer and petroleum products were Rs. 66,537 crore in B.E.2008-09 accounting for 11 per cent of net revenue receipt of the Government… total provision for subsidies on these three items, including Rs. 95,942 crore of Special Securities, has gone up from Rs. 66,537 crore in B.E.2008-09 to Rs. 2,18,294 crore in R.E.2008-09 amounting to about 4 per cent of GDP… Total subsidy is estimated to decline to Rs. 1,00,932 crore amounting to 1.7 per cent of GDP in B.E.2009-10. In medium to long term, there is a need for policy objectives to focus on measures and means to cap this expenditure to create further fiscal space for increased investment in physical and social infrastructure.”

Although the Government estimates total subsidies to decline, the subsidy bill is still a cause for concern. The declined estimate does not signal any change in policy; but as this Hindu Business Line report notes, it reflect the expected savings due to the drop in fertilizer prices. Furthermore, although the impact of the financial crisis has not been felt as strongly in India yet as in the west, it is important to remain alert on this front too. This is what the Government had to say on this issue in its Fiscal Policy Strategy Statement:
“The Government had two policy options before it. In view of falling buoyancy in tax receipts, the Government could have taken a decision to cut expenditure and thereby live within the estimated deficit for the year. The second option was to increase public expenditure, even with reduced receipts, to stimulate economy by creating demand and maintain the growth trajectory which the country was witnessing in the recent past. The Government took the second option of adopting fiscal measures to increase public expenditure to boost demand and increase investment in infrastructure sector. Ensuring revival of the higher growth of the economy will restore revenue buoyancy in medium term and afford the required fiscal space to revert to the path of fiscal consolidation.”

In this context, the government has approved investments of Rs. 70,000 crore in infrastructure projects from August 2008. Additionally, the budget reiterates the Rs. 20,000 crore recapitalization package for banks. The new government will have its work cut out in order to ensure that the Indian economy remains solid. It remains to be seen what measures will be put in place after the elections. Hopefully, the new administration will see the wisdom in Nani Palkhivala’s words, “We keep on tackling fifty-year problems with five-year plans, staffed by two-year officials, working with one-year appropriations – fondly hoping hat somehow the laws of economics will be suspended because we are Indians!”

The budget documents, speech and The Finance Bill, 2009 are available on this site. A Business Standard analysis is available here. Another Hindu report is linked here.

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