Budget gets mediocre response

Faced with the triple challenge of reviving a sagging economy, returning to the path of fiscal consolidation and restoring reform credentials of a politically battered government, he has tried, invoking Shakespeare, to be cruel in order to be kind.

In the end, he has fallen between the stools, satisfying neither economists nor markets nor the common man. His budget for 2012-13 is short on delivery but long on hopes and promises.

The fiscal deficit for 2011-12 has ballooned to 5.9 per cent of GDP as against the budget estimate of 4.6 per cent. Mukherjee proposes to bring it down to 5.1 per cent of GDP next year by levying additional taxes of over Rs414 billion taxes and controlling subsidies to two per cent of the GDP. He has vastly expanded the service tax net. All services barring 17 in the negative list and a few exemptions will be taxed. He has hiked the rate for service tax from 10 per cent to 12 per cent. There is a similar hike in excise duty.

It can be argued that services sector, which accounts for about 59 per cent of the GDP, must contribute much more to the exchequer than it currently does. Also, excised duty rate, which was slashed from 16 per cent to eight per cent as a stimulus to fight recession needs to move up now. Apart from raising additional revenue, the hike in also touted as a step towards the long-promised Goods and Service Tax (GST). All this may be true. But it does not detract from the fact that the extra levy has come at a time when the industrial growth is faltering. The economic growth is decelerating and there is nothing in the tax proposals to revive it.

Mukherjee has said that the subsidy bill will be contained to two per cent of the GDP, and that only the subsidy on food would henceforth be fully provided for. The funding on all others will be within the overall cap. This can only mean steep rises in prices of fuels and fertilisers — or high fiscal deficits. There is a reference to efforts at disbursing fertiliser subsidy directly to retailers and “eventually to the farmer” but no specified time-frame. The budget has little to cheer industry or boost investment. The increase in excise duty and service tax will push up costs all around, which cannot be passed on fully to the consumers in the current situation. The high fiscal deficit and the huge government borrowings will make it that much more difficult for the Reserve Bank of India to reduce interest rates. No wonder, the markets gave the budget thumbs down.

The proposals on direct taxes are even more regressive. There is a small relief in income tax on taxpayers at the bottom, ten times as much relief for those in the middle and no extra burden for those at the top.

Even after inflicting all the pain, there is no certainty that the fiscal deficit would be contained in the budgeted limit. The projected increase in revenues is too optimistic is the past year is any guide. Several expenditure items, especially subsidies, look underprovided. For the common man, life will be more taxing. Numerous items, from housing to phone and power bills will cost more and more pain may be waiting on his way. Overall, the budget makes right noises, but fails to show the way.

Views expressed by the author are his own and do not reflect the newspaper’s policy.