The Budget can no longer be a statement of the income and expenditure of the Government, neither can it remain a political instrument insulated from the economic realities. It is in fact a statement of the Government’s vision, ambition, roadmap, intent, and most importantly, an articulation of the aspirations of diverse interest groups that make India.
The Budget is expected to address challenges facing the nation and in the present context these include implementation issues, transparency, accountability and quality of outcomes, corruption, governance deficit, and leakages from Government spending and programmes. The mandarins in the Finance Ministry have clearly demonstrated a lack of bureaucratic capability and political will in addressing these issues.
Budget 2011-12 has been presented to an India replete with paradoxes. On one hand, there is a need for capping the fiscal deficit through fiscal consolidation which includes increasing tax returns, disinvestments, curtailing expenditure, reduction in subsidies etc.; on the other hand there is a need for inclusive growth through Government spending and allocations to the social sector.
On one side is the need to control inflation through roll back of the fiscal stimulus, tightening of the monetary policy, increasing interest rates on borrowings; on the other there is need for economic growth, employment generation etc.
This budget seems to have achieved neither one end of the spectrum nor the other. It can best be described in paradoxical terms: Directionless, ambitious, no harm, incredulous and certainly bereft of a vision and strategy to address governance challenges and economic paradoxes.
The Numbers
- Economy expected to grow at 9%
- GDP at 13.5%
- GDP size Rs 8980860 Cr
- Fiscal Deficit at 4.6% of GDP
- Net Borrowings 3.8 trillion USD
- Revenue deficit 3.6%
- National savings rate stagnant
- Disinvestments expected to yield Rs 40,000 Cr
- Government spending pegged at 3%
The Hits
- Timelines for rollout of the GST and Direct Tax Code
- Direct Cash Transfers of subsidies on cooking gas, kerosene and fertilisers to end beneficiaries through Unique Identification Number, modelled on the successful Brazilian experience
- Allows foreign individual investors into Indian mutual funds
- Corporate Sector spared increase in corporate tax rates, excise duty rates and interest on bank borrowings. Changes in surcharge and Minimum Alternate Tax expected to have a marginal impact
The Misses
- The fiscal deficit does not factor the food subsidies estimated at Rs 92,000 cr if the Food Security Act is passed; neither does it factor the increase in subsidies needed if the international crude oil prices surge. Wages under the MGNREGS are expected to be linked to minimum wages or to the increase in the price index which could mean greater outflows to finance the scheme. The Deficit does not take this into account.
- The yield through disinvestment would be subject to market sentiment, investor confidence in capital markets, and the overall economic growth. The number may or may not be achievable.
- Outlays in education not supportive of the Right to Education Act. Estimated requirement Rs 33000cr, outlay pegged at Rs 21000cr.
- Government spending in the current fiscal 2010-11 stands at 11% of GDP; hence to peg it at 3% of GDP for 2011-12 defies reason and strains credibility.
- Proposals continue to be framed by bureaucrats very narrowly and conservatively. Only 35 % are known to take off, the rest get mired in fine print, legalese and implementation.
- Does not suggest any steps to align country with parameters related to “Ease of Business” in the context of other South East Asian countries.
- As a matter of fact the outlays do not support the rights created by the proposed Food Security Act, and Right to Education Act.
- There is no mention of the intent to clear the mess in the Microfinance Landscape. Currently all the stakeholders, the banks, the MFIs and the Beneficiaries are in a state of drift.
- Gender mainstreaming through budgeting not even attempted. The intent to improve the social and economic needs of women seems like a far cry. Gender commitments made in political manifestos not translated into budgetary commitments. Gender budgeting cells in Ministries remain in a comatose state. As against a commitment to allocate 30% of the resources in the Ninth Plan to women development, only 1% has so far got allocated in consecutive budgets to women development schemes.
- Changes in personal taxation can be celebrated as non events. Senior citizens at 60 years and above are eligible to an exemption increase from 2.4 to 2.5 lakhs; very senior citizens at 80 years and above, a new classification, are eligible for exemption of 5 lakhs and men in the productive age group get an increased exemption from 1.6 to 1.8 lakhs per annum.
- Income tax documentation for those whose source of income is only salary and have a TDS will not be required to file income tax returns. This is expected to impact a very marginal segment of the population who do not have income from any other source including interest, rent, capital gain or business.
More significant pointers
- Rural budget covering rural housing, livelihood, infrastructure, slashed from Rs 760000 Cr to 740000 Cr.
- Investment in Healthcare 1.4% of GDP. In real terms the allocation has been boosted by 20% .Not progressive, as serious delivery gaps need increased outlays.
- Outlays in education do not support the Right to Education Act. The Sarva Siksha Abhiyan responsible for universalisation of elementary education (I to VIII) requires an estimated investment of Rs 33000 Cr/annum. The current outlay is pegged at Rs 21000 Cr, a whisper above Rs 19000 Cr invested in Fiscal 10-11. In specific terms the outlay does not address real issues in education: Research, Quality of Education, Quality of Teachers, absenteeism, Curriculum upgradation.
- The ICDS scheme which is suffering from evident maladies including poorly paid staff, gets the benefit of salaries of aangan vadi workers doubled.
Recipe for Redemption
Can the Government redeem itself from the fiasco called the Budget? Here’s how:
- Present a Performance Budget giving the nation a peek into Government performance in the current fiscal against budget targets, estimates, and through an audit of the level of efficiency with which resources have been used.
- Identify chronic gaps and implement strategies/roadmaps around addressing them and creating a follow through mechanism.
- Use technology and systems to reduce dependence on human processes and inputs. At the click of the Mouse, the Political Masters should be able to see the workflow, analyse bottlenecks, fix responsibility, and assess time and cost overruns in any project and service delivery.
- Publicly accessible expenditure tracking system set up through technology helping real time tracking of expenditure and accountability.
- Engineer a paradigm shift in measuring performance/success. The Government must depart from effort orientation to result orientation, from quantitative outputs to qualitative outcome orientation.
- Budget proposals need not be couched in secrecy any more. Transparency and Inclusion demands an open, informed discussion with diverse verticals, interest groups for inputs before proposals are finalized for presentation.
Sectoral Impact
- Luxury: Growing at 21% YOY fuelled by the increase in HNI households currently the number being 220,000.No cut in Custom duties.
- Challenges: Duty on luxury goods between 20-40% making them unattractive in India as the price gap ranges between 30-40%.
- Consumer Goods: No increase in Excise Duties. Sector growing at 15% year on year. Budget favourable to further consumer demand, investment and top/bottom lines of manufacturing companies.
- Challenges: Sector lagging behind China by 12-15 years. 85% of the Indian population under penetrated by the sector.
- Retail (Textiles): No FDI in multibrand retail yet. The optional excise duty @ 10% transformed to mandatory excise duty on branded garments. The sector is expected to pass this on to the customer. There is a thrust in improving supply chain efficiency. Boon for modern retailing, including storage and cold chain.
- Challenges: It is already reeling under high rentals, high attrition, high manpower cost, lack of trained talent and low disposable incomes due to inflation.
- Auto: No change in central excise duties and some incentives for manufacturers of green vehicles. Budget will help to sustain moderate growth rate.
- Challenges: The sector is grappling with high input costs, high costs of vehicle finance, crimp growth and demand.
- Construction: Allocation is 23% higher.
- Banking and Finance: 9% economic growth would translate to higher borrowings and credit off take. Credit flow to farmers increase from 3.75 to 4.75 thousand crore. Government to help select banks to recapitalise.
- Mutual Funds: Foreign Individual Investors can invest in Mutual Funds directly.
- Distribution of schemes through direct agents overseas or online.
- This would give depth to the MFs; at the same time the industry can expect volatility. It would enable them to tap foreign money.
- The Funds would require to get registered in the country for business.
- Insurance: 1.5 % Service Tax on all Plans except term policies a surprise proposal. The tax is likely to be passed to the customer and is against long term investment and savings.
- Outlay in the swasthaya bima yojna for the unorganised sector reduced to half.
- Aviation: Service Tax increased on Business Class travel.
- Sugar: No impact.
- Media: Impact neutral.
- Petrochemicals: Impact neutral.
- Telecom: The increase in the Minimum Alternate Tax has been neutralised by reduction in surcharge.
- Steel: Increase in export duty on iron ore will impact units which export; expected to ease availability of iron ore in the domestic market and reduce input costs.
- Healthcare: Patients in hospitals with air conditioning and 25 beds will be paying a service tax of 5% both on cash and cashless transaction.
- Keeping healthcare inaccessible and unaffordable.
- Outlay on Health Insurance for unorganised sector has been reduced.
- No further sops for attracting investment to the sector.
- Oil and Gas: Subsidy inadequate; direct cash transfer to BPL population a good move.
- Hotels and Tourism: Increase in service tax on rooms where tariff is higher than Rs 1000 per room night.
- Increase in service tax on air conditioned restaurants offering Alcoholic beverages.
- Infrastructure: Increase in outlay and FII participation in infrastructure Bonds to increase.
- Housing: Proposals spur growth.
- FMCG: Cold Storage Chains to be constructed and given infrastructure status; equipment exempt from duty.
Conclusion
The budget has not made any earthshaking provisions for the social sector. The focus was on growth, but it did emphasize on equity. The policy announcements made during budget are sure to have a negative effect on the life of common people.
The education, health and livelihood sectors are likely to be affected seriously by some of the announced policies. For instance, the policy shift to move from subsidy to Cash transfer based on Brazil and Mexican model, what guarantee is there to protect the common man from being exploited by market forces? Will the cash subsidy given for kerosene reach the intended population? The PDS system is a huge example that demonstrates the pitfalls in managing the ‘targetted’ population, and even if the targeted population gets the money, what is the guarantee that the family will spend it on food, education and health care and women and children?
Food subsidies will be withdrawn and the poorest of poor will further fall into deprivation due to rising food prices. The already swelling number of malnourished girls and boys in the under-five age group and among adolescent girls and boys, lactating and pregnant women, will increase, causing more expenditure on primary health care. Will the current policy improve the accountability of the Indian public health system?
The MNREGA is trying to link to the minimum wages or the price index, clearly indicating a requirement for increased budget allocation. But the Finance Minister has announced the same budget as last year for MNREGA, so how will additional costs be met? The silence on health care expenditure, reduced allocation for the diverse social sectors, indicates that the government is thinking that redistribution of wealth and reduction in inequities will take care of itself automatically. In order words, all needy sections have been told to wait for Utopia.
(The author is a human resource development consultant)
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