Expect people-friendly budget ahead of 2009 elections

February 17th, 2008 - 11:48 am ICT by admin  

A file-photo of Manmohan Singh
(Commentary)
By Sushma Ramachandran
Indian Prime Minister Manmohan Singh’s government is gearing up to present its last budget before the general election and there is no doubt that “please-all” is going to be the mantra for this annual accounting ritual. Finance Minister P. Chidambaram has made it clear that next year will only be a vote on account, so his last budget speech - at least under the present regime - will be on Feb 29.

A peek into the government’s mindset as it goes into formulating its last budget has already been given in the endless dilly-dallying over raising fuel prices.

Meeting after meeting of the empowered Group of Ministers failed to reach a decision on raising oil product prices even though world crude oil markets reached peaks of around $80 to $90 per barrel over the last year.

The public sector oil companies have had no option but to bear the burden of the losses on sales of petrol, diesel, LPG (liquefied petroleum gas) and kerosene but the impact was being felt on the bottom-line of these usually cash-rich firms.

Despite the urgency of the matter, the government only this week bit the bullet and decided to raise diesel and petrol prices marginally.

But this will only help the oil companies by about Rs.8.4 billion in the current fiscal, a drop in the ocean compared to the total under-recoveries of about Rs.930 billion during 2007-08.

The finance ministry, however, stuck to its guns and did not announce any tax cuts on oil products because this would have affected revenue collections. Though these have been quite buoyant in the current fiscal, North Block knows that large resources are needed to support populist schemes in a pre-election year.

As the instance of the fuel price hike shows, the Congress is pressuring the government to ensure that such potentially unpopular decisions should not be implemented. And the central budget is not just a bland accounting statement. It has always reflected the political mood of the day.

The mood of the Congress right now is to go full throttle for populist schemes that would woo voters in the 2009 elections. In fact, the party has already submitted a pre-budget memorandum urging the finance minister not to stick to the timetable for fiscal discipline laid down by the Fiscal Responsibility and Budget Management Act (FRBM).

Achieving the FRBM targets of reducing the fiscal deficit would mean that Chidambaram has to cut back on spiralling expenditure and use the buoyant revenue collections to reduce the fiscal deficit.

The Congress, on the other hand, is arguing that a year or two’s delay in implementing the FRBM targets would not make much of a difference.

This argument has already been made by the Left parties for quite some time as they have been strongly opposed to the FRBM Act, insisting that it will not allow the government to move forward on higher spending in the social sector.

As far as the FRBM is concerned, independent think tank Centre for Budgetary Governance and Accountability has also pointed out that similar legislation in other countries has not been adhered to in many cases.

Even developed countries have not been able to achieve such stringent fiscal discipline guidelines because of the need to ensure that developmental expenditure is carried out during the year.

In countries like India, it notes, there is an even more urgent need to ensure that sufficient funds are made available for development especially in areas like health, education and agriculture.

At the same time, both the finance minister and the prime minister have always been careful accountants and are bound to prefer keeping expenditure curbed within FRBM guidelines.

Much will thus depend on whether Congress supremo Sonia Gandhi decides to intervene on this ticklish budgetary issue.

On some issues, however, the finance minister seems to be on the same page, as it were, with the Congress.

He has already given a pointer to the fact that the social sector, especially health and education, are at the top of his agenda while agriculture also is likely to come in for some attention.

But the fact is that the budget can do little substantial for these sectors, barring announcing large financial allocations for the 2008-09 fiscal.

As far as agriculture is concerned, for instance, most of the key decisions lie with the states. The centre can - and already has - implemented several policies linked to easier credit flows to farmers.

It can also provide better facilities to buy inputs like fertiliser and seed and keep subsidy levels high so that these remain affordable for the cultivator.

Similarly, it can try to give a boost to irrigation - an area on which action has also been taken in the previous budget.

The health and education sectors have also been paid some attention in the past few years and big initiatives like the Sarva Shiksha Abhiyan are already being carried out throughout the country.

The question is what the finance minister can do that has not already been done in these sectors.

Apart from announcing some new schemes, the big problem here has been implementation of existing programmes. This has been extremely uneven with better-governed states performing well and others failing dismally to meet targets.

The worst performers are what are known as the BIMARU group of states, which include Uttar Pradesh and Bihar.

So, apart from launching new schemes in the health and education sectors, the government may quite likely develop a carrot and stick policy, rewarding the better-governed states and cutting back on funds to those notoriously careless about utilising these central funds efficiently.

Agriculture will be high on the agenda for this budget, especially since it provides up to 60 percent employment in the country and rural areas form major vote banks for the ruling United Progressive Alliance (UPS) coalition.

Farmers’ suicides have been continuing unabated, a testimony to the collapse of the credit delivery system. Having to bank on moneylenders, farmers have been resorting to suicides when their crops fail and huge debts mount on their heads. Thus, easier loans for farmers are clearly going to be a priority area for Chidambaram.

Corporates may not get major sops, given the fact that industrial growth has been going on track, especially manufacturing.

At the same time, the finance minister would not like to disturb the existing scenario, especially with the stock exchanges having shown such volatility in recent weeks.

He is likely to tread carefully to ensure that core and infrastructure industries continue to perform efficiently and provide sufficient investment to drive the economy to the target of over nine percent growth in the next fiscal.

The fears of recession in the US have also spread a cloud over the Indian bourses, so he is not likely to impose any taxes that could act as a dampener to the corporate sector.

In fact, there could be some sops to export-oriented industries, which have been facing tough times owing to the rising rupee and fears of a global recession.

As for hopes of cuts in personal income tax, these are not likely to fructify given the need for higher funds to finance social sector projects. Income tax collections have literally been booming, but these monies will be needed for both infrastructure and social sector projects.

On the other hand, the finance minister could provide some rationalisation that would target specific groups as has been done in the past for women and senior citizens.

The urban middle class, which form the bulk of personal income tax payers, are sadly not much of a target group before the general election, but one can only hope that the finance minister decides to give some rewards for the growing voluntary compliance in paying taxes by this segment.

In sum, this is going to be a people-friendly budget, with sights firmly set on the 2009 poll.

But from now till the end of the month, Chidambaram will have his work cut out for him negotiating with both the Congress and the Left to ensure that populism does not overwhelm the budget and allow him to maintain the fiscal discipline needed in the long run for the economy.

(Sushma Ramachandran is an economic analyst. She can be contacted at sushma.ramachandran@gmail.com)

Tags: , , , , , , , , , , , , , , , , , , ,

Posted in Business |

Subscribe