| Interim Budget of India 2009 -10
[The most disturbing feature of the interim budget (meant to cover only the first quarter of the next fiscal) is that the annual allocation under the "defence" head in nominal terms has gone up by 34% over the current fiscal - from Rs. 1,05,600 crore to Rs. 1,41,703 crore, even if a part of the rise is on account of the recent pay hikes. That's definitely not conducive to peace building in the region.
On the other hand, large rises in allocations (in nominal terms) for NREGS (from Rs. 16,000 crore in 2008-09 to 30,100 crore in 2009-10), Bharat Nirman (from from 31,280 crore to 40,900 crore), JNNURM (from 6,866 crore to 11,842 crore) and National Rural Health Mission (NRHM) (from 2,050 crore to 12,070 crore) must be highly welcome.
There is also significant rise for higher education.
In deference to the usual norm, the Finance Minister has desisted from making any major policy decisions as a part of the "interim" budget. But that has severely jolted the "Yeh Dil Maange More" corporate sector. The stock market has strongly reacted. But nothing is more revealing than the banner headline of the Asian Age: "NOTHING IN IT FOR YOU & ME". Evidently, the NREGS, the Bharat Nirman, the NHRM are all meant for some unknown and invisible inhabitants of a distant planet.]
Interim Budget 2009-10: More an Election Manifesto, Less A Budget
The Tribune, February 18, 2009
A Budget is more about the year ahead, and not about the years past. The interim budget for 2009-10 lauds the performance of the UPA government in the last four years. It ignores the negatives in this period. Further, it glosses over the considerable negative news in 2008 which called for action. It looks as if the budgetary allocations are sharply up but the big increases were last year and they are merely being maintained.
The positives are the high rate of economic growth, a low rate of inflation, high growth in exports, rapid flow of foreign capital, build up of foreign exchange reserves, good growth in agriculture, implementation of NREGS and many social sector schemes. Given the high growth rate, revenues increased sharply so that there was scope of spending more on critical schemes. However, critics have argued that not enough was done given the potential and the crisis in the lives of the poor. Be that as it may, the list is impressive.
What are the omitted negatives? Given the nature of growth, dependent on services sector, privatization, displacement of the unorganized sector production by the organized sector, rapidly growing pollution and high amounts of displacement, it was over estimated by the official statistics. For similar reasons, inflation was underestimated. No wonder, while the government claimed low rates of inflation, the citizen complained of high inflation - perceptions differed sharply. However, disconcertingly, growth led to growing disparity in the economy. While the corporate sector backed by massive concessions did phenomenally well with profits more than tripling, the status of the Aam Admi, the supposed focus of the Congress (I), stagnated or declined.
Disparities of every description increased - between the rural and urban areas, backward and forward states, agriculture and non-agriculture, capital and labour and organized and unorganized sections. This is what fuelled the rapid increase in the savings rate in the economy by an unprecedented 15%. The rising profits also fuelled a rapid increase in the investment rate by a similar amount. However, it also made the growth path unstable because it became dependent on a narrow segment of society. It is this feature that has led to a sharp decline in India's growth rate in the last six months. As soon as the incomes of the elite sections and the profits of the corporate sector were hit by the global crisis, both consumption demand and investment rate declined triggering the down turn.
Currently, exports are declining rapidly because of global recession, industrial growth has turned negative and large segments of the services sector are declining or slowing down. The result is that the current rate of growth of the economy (not the average) is close to zero if not negative.
The budget supports this contention when it projects a 2% nominal growth in customs and excise duties (at unchanged rates). Adjusted for a 4% rate of inflation, this would suggest a 2% contraction for this segment. A 6% nominal growth is expected in Service Tax so the real growth would be 2%. Finally, the growth in income tax and corporation tax is projected at 10%. Like last year's figures which were based on optimistic projections and have now fallen substantially short this year's figures are also likely to be overstated. If even the optimistic projections are as low as they are then India's growth is likely to be negative.
Amongst the other negatives, one may count the rapid increase in the revenue and the fiscal deficits for the current year (2008-09) from the budgeted figures of 1% and 2.5% to 4% and 6% respectively. These unprecedented increases were anticipated by the experts because of the over estimation of revenues and under estimation of the expenditures on pay revision, farmer's loans, petro-goods subsidies and so on. Thus, FRBM Act has been given a quiet burial. It is not surprising that at the first hint of a crisis for the elites, this apparently stringent act has been relegated to the dust bin while till last year when funds were needed for the Aam Admi, this act was cited as an impediment.
The Congress (I) has also suddenly discovered the farmers as the heroes. The last many years when they were committing suicide at record rates, they were hardly the focus of attention. Now that demand has to be raised quickly to counter the downturn, they are seen as the saviours. Because of their poverty, they will spend much more and create a market. Clearly, they do not matter in their own rights but as an adjunct to the non-agriculture sector – the real concerns of the rulers of the country. It is a pity that the FM says that 60% of our population lives in the villages when that figure is closer to 70%. It is surprising that the figures given in the budget speech are sometimes in numerals and at other times in mixed numerals and words. It perhaps indicates a hurried job.
This brings us to the final point as to why the budget did not announce a package to deal with the rapid slow down in the Indian economy. Almost the entire world is admitting that their economies are in recession or in rapid decline. Every country is announcing big bail out packages. The USA has announced till now (in various forms) trillions of dollars of bail out (several years of India's national income) and China has announced a package of Rs.29 lakh crores over two years.
We continue to announce that we will have 7.1 per cent growth this year and that next year 9 per cent is achievable while everyone else is expecting a worse year. Given our current trends, the government is in a state of denial and that is why it is content to announce packages of Rs.40,000 crores and Rs.20,000 crores. The RBI's release of liquidity just about compensates for the decline due to fall in foreign exchange reserves. Where is the urgency?
The government claims that it is a vote on account and no new policy measures could be announced with a new government due to take over soon. But the government has been announcing measures outside the budget all the time and given the unprecedented crisis, the like of which we have not seen in our lifetime, expenditures in critical areas could have been boosted and governance tightened up. In 1991, when the Narsimha Rao government took over in the midst of a crisis, it acted undemocratically and in haste, with little time to reflect and the poor had to suffer. A repeat of this is likely.
The non action and denial mode maybe explained by the party's desire to win the coming elections by projecting a positive image of its performance. Admitting that the situation is grim and acting strongly to prevent it from deteriorating may have been seen as a self goal by the ruling party. Clearly, between the party's interest and the national interest, the former won hands down. There is another twist in the tale or tail. If the New Economic Policy strategy is admitted to fail, the blame for that would also go to its initiator, the party and the present PM. This may trigger demands for accountability so brazening it out for a few more months is a safer strategy. email@example.com
Vote on Account: A summary dismissal of slowdown
17 Feb 2009, 0046 hrs IST, Swaminathan S Anklesaria Aiyar, ET Bureau
NEW DELHI: Y-a-a-a-w-n. The interim Budget was the mother of all anti-climaxes. Instead of virtually launching the Congress party's election
campaign, as was widely expected, stand-in finance minister Pranab Mukherjee produced a long, bald statement of government accounts, so boring that some members of Parliament nodded off. Not a single new scheme or tax initiative relieved the tedium.
The business community, hoping for relief for recession-hit sectors and a spur to demand, was disappointed. The Sensex plummeted 329.2 points. However, this index was down 200 points even before the Budget speech ended, so much of the fall was due to gloomy global factors. The Budget speech deepened the gloom.
Mr Mukherjee claimed that constitutional propriety obliged him to stick to a bare statement of accounts, and not announce any new schemes or tax proposals. However, this claim of propriety drew gasps of disappointment at what was widely seen as a missed golden opportunity. Such cynicism emanates from the fact that a government with seven tainted Cabinet ministers cannot with a straight face claim that propriety is a top priority.
So, Mr Mukherjee's anti-climactic Budget was widely interpreted as tactical. Sonia Gandhi will very soon be launching the party's election campaign, and analysts speculated that she might not want Mr Mukherjee to steal any of her thunder. Party insiders said the public should expect something big very soon.
Bond yields rose with the revelation that government borrowing for 2009-10 is being budgeted at almost Rs 2,00,000 crore higher than the original estimate for this year. However, it is not much higher than the revised Budget figure for 2008-09, so the bond market has overreacted. Besides, the finance secretary later said the additional borrowing would not fall entirely on the markets, meaning RBI will be a big buyer.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-Budget items like dues to oil and fertiliser companies. Throw in another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However, at a time of deep recession, this should be seen as an economic stimulus rather than profligacy. Indeed, the government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. Mr Mukherjee said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism — for example, farm loan waivers — has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages.
For 2009-10, the Budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment.
These ratios assume that nominal GDP will rise 10.97% next year, with inflation accounting for around 4% and real GDP growth for around 7%. This looks rather optimistic, given gloomy IMF projections of barely 5% real GDP growth in 2009. Chief economic advisor Arvind Virmani hopes the economy will pick up substantially in the second half of 2009-10.
Even with projected 7% GDP growth next year, the Budget projects tax revenue that will actually be lower — Rs 497,596 crore — than the sum originally expected in 2008-09 — Rs 50,7150. This is on account of tax cuts in the stimulus packages to date, and expectations of weak corporate profits.
The 2% interest rate subvention for export credit, which was due to expire on March 31, will be extended to September-end. Curiously, the 4 percentage points cut in excise CENVAT has not been similarly extended, which means prices will rise by that amount on April 1.
However, at a post-Budget press conference, the finance secretary said the government would decide at the right time on extending this rebate — after all, the interim budget was only one of many instruments at the government's command. The two stimulus packages already announced had launched anti-recession initiatives in several sectors, he said, and more would be done, as and when necessary.
Mr Mukherjee announced a virtual doubling of outlay for his government's flagship programme — the National Rural Employment Guarantee Scheme — from Rs 16,000 crore to Rs 30,100. This is largely because the scheme now covers all 597 districts. The urban renewal mission outlay has been almost doubled from Rs 6,866 crore to Rs 11,8432 crore.
But, strangely enough, the outlay for the Sarva Shiksha Abhiyan remains unchanged at Rs 13,100 crore. For the National Rural Health Mission, the allocation barely moves from Rs 12,050 crore to Rs 12,070 crore, and for the Rajiv Gandhi Drinking Water Mission barely moves from Rs 7,300 crore to Rs 7,400 crore. In real terms, outlays are actually down on these last three flagship programmes, as also for the Integrated Child development Scheme. Doubtless Opposition parties will use this as ammunition to pooh-pooh the government's claims to having the aam aadmi close to its heart.
Mr Mukherjee spent a fair amount of his budget speech on the achievements of his government since 2004. He said the promises made in the Common Minimum Programme had been fulfilled in very substantial measure. In 2004, his government had promised GDP growth at a sustained rate of 7-8% per year, and had actually achieved a "dream run" of 9% for three years running. This talk of a dream run sounded not unlike the BJP's claim of having delivered a "shining India". It remains to be seen whether the electoral consequences are very different.
|Your 10 minute resource to the Interim Budget| As Pranab Mukherjee rose to present the Interim Budget for 2009-2010, he did not shirk to borrow liberally from US President Barrack Obama's speech.
"Five years ago the people of India had voted for change," with that, Mukherjee, began his address to the house. As in that sentence, and through the rest of the speech, the Minister minced no words in highlighting the country's performance under the UPA government.
From spelling out the seven economic objectives from the Common Minimum Programme to indicating, albeit mildly, that his government, if re-elected will offer attractive tax sops, the speech was just what Corporate India expected – plain vanilla. Moneycontrol brings you the interim budget, complete with reactions but without the jargon!
Part 1: Review of the 7 economic objectives of the Common Minimum Programme
One: Maintaining a growth rate of 7-8 per cent per year for a sustained period
- Gross Domestic Product (GDP): 7.5 per cent in 2004-05, 9.5 per cent in 2005-06, 9.7 per cent in 2006-07 and 9 per cent in 2007-08.
- India's exports grew at an annual average growth rate of 26.4 per cent in US dollar terms during this period.
- Foreign trade increased from 23.7 per cent of GDP in 2003-04 to 35.5 per cent in 2007-08.
- Manufacturing, registered as well as unregistered, recorded a growth of 9.5 per cent per annum in the period 2004-05 to 2007-08.
- Communication and construction sectors grew at the rate of 26 per cent and 13.5 per cent per annum, respectively.
Two: Providing universal access to quality basic education and health
-An Ordinance has been promulgated for establishing 15 Central Universities.
- Six new Indian Institutes of Technology (IIT) have started functioning in Bihar, Andhra Pradesh, Rajasthan, Orissa, Punjab and Gujarat during 2008-09.
- Two more IITs in Madhya Pradesh and Himachal Pradesh are expected to commence their academic sessions in 2009-10.
- 5 IISERs announced earlier are now functional.
- Two new schools of Planning and Architecture at Vijayawada and Bhopalhave already started functioning.
Three: Generating gainful employment and promoting investment
- The domestic investment rate as a proportion of GDP increased from 27.6 per cent in 2003-04 to over 39 per cent in 2007-08.
- The gross domestic savings rate shot up from 29.8 per cent to 37.7 per cent during this period.
Four: Assuring hundred days of employment to the breadwinner in each family at the minimum wage
- 'Priyadarshini Project', which is a rural women's empowerment and livelihood programme, was launched in U.P. with the assistance of IFAD.
- A revised and modified scheme named 'Indira Gandhi National Old Age Pension Scheme' was launched.
- The Government launched Rashtriya Swasthya Bima Yojana for BPL families in the unorganized sector
Five: Focusing on agriculture, rural development and infrastructure
- The gross capital formation in agriculture as a proportion of agriculture GDP improved from 11.1 per cent in 2003-04 to 14.2 per cent in 2007-08.
- During this four year period, the annual growth rate of agriculture rose to 3.7 per cent. - The production of food grains increased by about 10 million tonnes each year to reach an all time high of over 230 million tonnes in 2007-08.
- The Rashtriya Krishi Vikas Yojana was launched in 2007-08 with an outlay of Rs.25 thousand crore
- To strengthen the short-term co-operative credit structure, the Government is implementing a revival package in 25 States involving a financial assistance of around Rs.13 thousand five hundred crore.
-Government will continue to provide interest subvention in 2009-10 to ensure that farmers get short term crop loans upto Rs.3 lakhs at 7 per cent per annum
- The Agricultural Debt Waiver and Debt Relief Scheme for farmers, announced in the last budget speech, was implemented
- The corpus of RIDF was increased from Rs.5,500 crore in 2003-04 to Rs.14 thousand crore for the year 2008-09 ensuring greater availability of funds for its activities.
- Given the importance accorded to housing for the weaker sections in rural areas, 60 lakh houses were to be constructed under the Indira Awaas Yojana by 2008-09. In the period between 2005-06 and December 2008, 60.12 lakh houses have already been constructed.
Six: Accelerating fiscal consolidation and reform
- The fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent.
- The tax to GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08 bringing us within striking distance of the target for fiscal correction.
Seven: Ensuring higher and more efficient fiscal devolution
- Distortions within the tax structure have been reduced by expanding the tax base and moderating the tax rates.
- The personal income-tax rates have been rationalized by increasing the threshold limit and adjusting the tax slabs to provide relief to taxpayers.
- Similarly, Customs Duty rates have been steadily reduced to eliminate the bias against the export sector and promote competition and efficiency in the manufacturing sector.
Part 2: Government's crisis management
The Finance Minister left no stone unturned in establishing that the government has been very proactive in handling the current global crisis and minimizing the impact on India. Here are his arguments:
- For the first nine months of the current year, the growth rate of exports has come down to 17.1 per cent. According to the latest figures available, the industrial production has fallen by 2 per cent year-on-year basis in December 2008. In these difficult times, when most economies are struggling to stay afloat, a healthy 7.1 per cent rate of GDP growth still makes India the second fastest growing economy in the world.
- The two packages announced on December 7, 2008 and January 2, 2009, provide tax relief to boost demand and aim at increasing expenditure on public projects to create employment and public assets.
- In the period from August 2008 to January 2009 alone, the Government accorded approval for 37 infrastructure projects worth Rs.70 thousand crore.
- To ensure that such projects do not face financing difficulties arising from the current downturn, we have taken a new initiative for providing refinance to the banks for long term credit extended to these projects. Accordingly, the Government has decided that India Infrastructure Finance Company Ltd. (IIFCL) will refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next eighteen months or so.
- The RBI took a number of monetary easing and liquidity enhancing measures including reduction in cash reserve ratio, statutory liquidity ratio and key policy rates.
Part 3: Proposed Allocations for the fiscal 2009-2010
Increased defence allocation
To increase the allocation for defence, which is a part of non plan expenditure to Rs.1,41,703 crore. This will include Rs.54,824 crore for capital expenditure.
Provision of Rs.95,579 crore for major subsidies including food, fertilizer and petroleum.
Proposal to review ceiling of fiscal deficit
The ceiling of fiscal deficit that the States can incur in 2008-09, in terms of the Debt Consolidation and Relief Facility set up under the Twelfth Finance Commission award has been increased by 0.5 per cent of the GSDP to 3.5 per cent. This may have to be reviewed in view of the response of the economy in the coming months.
Part 4: Recommendations for new government
While the Finance Minister did not directly make promises if he came back to power, he enlisted recommendations that, according to him, the new government would need to look into. They are:
- Pursue macro economic policies to sustain a growth rate of at least 9 per cent per annum over an extended period of time
Strengthen the mechanisms for inclusive growth for creating about 12 million new work opportunities per annum
-Reduce the proportion of people living below poverty line to less than half from current levels by 2014
-Ensure that Indian agriculture continues to grow at annual rate of at least 4 per cent
- Bridge the infrastructure gap by increasing the investment in infrastructure to more than 9 per cent of GDP by 2014
- Support Indian industry to meet the challenge of global competition and sustain the growth momentum in exports
- Strengthen and improve the economic regulatory framework in the country
- Expand the range and reach of social safety nets by providing direct assistance to vulnerable sections and insulate them from dislocative effects of slowdown in economy
- Strengthen the delivery mechanism for primary health care facilities with a view to improve qualitatively the preventive and curative health care in the country
- Create a competitive, progressive and well regulated education system of global standards that meets the aspiration of all segments of the society
- Move towards providing energy security to all by pursuing an Integrated Energy Policy
And above all, the Finance Minister called for a lower tax rate so that people are able to cope with the financial crisis.
Part 5: Reactions from India Inc
On an overall basis, India Inc. was not surprised. Yet, Moneycontrol managed to get some reactions from the corporate biggies. Here's a sum:
"Indian industry should not be disappointed because he has made allocations substantially on both planned and non-planned expenditure including the giving of higher salaries.'
~ HP Ranina
"The six-month interest subvention is welcomed, but it is too little taking into consideration the status of the industry. The company will be able to save around Rs 4 crore for a six-month period."
~ Alok Industries (in a statement released to the press)
"We are a bit disappointed. However, the outcome [of the interim Budget] was as expected as there were no major expectations. We are expecting some announcement by the new government alone."
~ Orbit Corp (in a statement released to the press)
"We are not disappointed. We have another year to wait for STPI extension. If pressures continue, we would like to see some support from the government.'
~ Arvind Thakur of NIIT Technologies
"The extension on shipment loan interest subsidy till September 30, 2009, is a very short period. We were expecting an extension for the whole fiscal year. Maybe they will extend it again."
~ Vasant Mehta, Chairman of the Gems & Jewellery Export Promotion Council (GJEPC)
Does not matter
"I was not expecting much from this. For the next two-three months, we are going to have a policy freeze but monetary policies will address some factors like interest rates."
~ Sajjan Jindal, JSW Steel
"It's an extremely dry budget."
~ Ravi Ramu, CFO of realty group Puravankara
"It's a non event for the entire corporate world. The Interim Budget was merely a populist Budget."
~ Pradeep Jain of Prasvnath
"There is going to be one more year of uncertainty and investments. Till the new government is formed, investments will be on hold.'
~ Mohandas Pai of Infosys
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