Monday, March 19, 2012

Nothing great about the budget…..except maybe the support for Aadhar

Most political commentators have been disappointed by the financial budget presented by Pranab Mukherjee on the 16th. There were nothing “visionary” of the budget they said. However, most financial-world experts have praised the budget for being realistic, not too lofty, and making a sincere attempt to address the problems that the country (and the world) is facing.

There are hundreds of things that a budget tries to cover. However, for me the most important aspects of the budget relate to addressing the GDP slow-down, curtailing the fiscal deficit, controlling inflation and providing an impetus to the growth of infrastructure. Obviously, all of these are inter-linked and the Finance Minister has to decide what the relationships between them are likely to be. Beyond these important goals, the rest tends to be a little tinkering here, a little there.

Let’s look at how Pranab Mukherjee has handled the GDP slow-down issue. On the one hand, the government has increased the excise duties by 2% in most cases. If a reduction of 2% had had a positive impact on GDP growth, a 2% increase is bound to have the reverse effect. Growth could get cramped further in the industrial sector. Further, by increasing the scope of the Service Tax regime, there is a possibility (although this has not happened in the past even though the tax has been progressively applied to more and more service) that the Services sector could slow also down at least partially as well. The government had no options really – as the reduction in excise duty was only intended to be a temporary measure in the first place. While the excise and service tax will reduce GDP growth, there is nothing in the budget proposal really which is aimed directly at increasing the growth. The Finance Minister does however hope to increase GDP growth rates through indirectly.

Quite rightly, the Finance Minister appears to think that the growth rates in the industrial sector can be revived by a reduction in the interest rates. However, the RBI has clearly indicated that it would lower rates only if it saw sincere efforts by the government in reducing its own borrowing – or reducing the fiscal deficit in other words. The Finance Minister has made a plan for a lower fiscal deficit at 5.1% of GDP compared to the 5.9% that FY12 eventually saw. A reduction to 5.1% is hardly sensational; hence the disappointment in some sections of analysts. However, because of the same reason (that the reduction is hardly sensational), the budget has got applause from other sections – who believe that the goal is realistic given the many constraints the FM faces. So what Pranab Mukherjee hopes is that the RBI will see this as a sincere effort, and will oblige by reducing rates. Should that happen, the sentiment will lift, investments will increase and a higher GDP growth regime could kick in.

So again, GDP growth has been pegged to an easing of the monetary policy; there is hardly anything in the fiscal policy that the government directly controls.

What about the efforts at reducing fiscal deficit? I feel that the budget relies more on off-budget action than anything else. It is clear that the government wants to increase diesel prices. Will it have the political room to do so – in the face of a rampant and destructive ally Mamata? The government also wants to increase fertilizer prices, but again it will face major opposition. Will it be able to generate the Rs 58000 odd crores from 2G auctions? Most analysts think this is highly exaggerated; as the whole premise of the CAG in estimating the value of 2G licenses was flawed in the first place (all those who believe that the 2G scam was worth Rs 1.76 lac crores will be badly disappointed when the bidding finally happens). And yet, Pranab Mukherjee has budgeted for all of this to happen. That’s what makes the budget numbers wishy washy. Considering he suffers from a credibility issue after last year’s pompous claims, he could have been more forthright in addressing these issues within the budget itself.

Further, if diesel and fertilizer prices are indeed increased, then what about the effect on inflation? If inflation rises again (fuels have a 15% weightage in the inflation calculator and agriculture another 15% or so), then the RBI could refuse to reduce rates. The entire growth story would then come unstuck.

For me, the single most important aspect of the budget was the emphasis (for the first time) on the Aadhar scheme. Since very few people understand the revolutionary potential of this scheme, it didn’t find much mention in the media. Some Rs 14000 crores has been provided for extending the scheme from its present coverage of some 200 million people to more than double that number. The Aadhar scheme is a very ambitious one. Not only is it the biggest biometrics scheme anywhere in the world, it is also the one scheme that can have a seriously positive impact on curbing corruption (in the PDS system) and hence the subsidies budget (upwards of Rs 1 lac crores per annum; and set to go up further). If the targeted beneficiaries could be clearly and indisputably identified by an Aadhar number, then the subsidies that are being grabbed by ineligible people could be conserved. There are many other advantages of the Aadhar scheme. The Aadhar number can be used to open bank accounts; bringing much of the subsidies into the “white” measurable domain. The beneficiary wouldn’t have to take whatever trash the ration shops throw at him (selling the better quality in the market for high profits) – and would be able to use the cash in the bank to buy whatever he wants. And most importantly, financial benefits could be linked to other social goals as has been done in many Latin Americal countries – like forcing beneficiaries to enroll their children in schools, restricting the size of the family etc. This is the first budget that has made such an extensive allocation to the Aadhar scheme. This one measure alone can transform the way our economy works. This one measure alone can curb corruption like no Lokpal can.

The GDP growth can also get an impetus through some efforts made to grow the infrastructure in the country. The increase in the size of the tax-free infrastructure bond schemes from Rs 30000 crores to double that size should help plough more resources into this crucial sector. The import duty on coal has also been temporarily reduced to zero to tide over the crisis in the thermal power sector. Customs duties have been left intact in an effort to provide more resources (commodities) without raising their prices. So all this is good. But no where is there any effort to improve core “governance”. In the case of infrastructure, governance could simply mean implementing projects on time. If just this much could be ensured, the country would grow much faster. Resources wasted on delayed projects would be saved; and the gains from a faster developing infrastructure would propel the overall growth of the GDP much faster. Unfortunately, the PM’s much touted “formal appraisal” idea (appraisal of his ministers every six months) has been a non-starter. A budget is not the place for this discussion; but I do hope the government can show some will in improving the implementation of its plans.

The real truth is that the budget doesn’t address the GDP growth issue directly. It relies on an easier monetary policy for its growth. I would have liked to see more ambitious proposals on the fiscal side. Proposals that would spur growth directly. Like reforms in the FDI regime; stronger commitments on the infrastructure sector etc. But given the political scenario, we should be happy with what we got……

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