Tuesday, February 18, 2014

Bugdet Surprises !

Surprise, Surprise !

Finance Minister P Chidambaram
India’s Finance Minister P Chidambaram is a past master of surprises and he certainly lived up to his reputation with his Monday morning interim budget even if it was at the cost of a smart piece of statistical jugglery.
Ignoring MPs trying to shout him down as he read out his 17-page speech, a page shorter than that read out by President Pranab Mukherjee in his interim budget of 2009,   Chidambaram announced he had managed to squeeze Government’s fiscal deficit to 4.6 per cent against a target of 4.8 per cent of GDP, on the back of a successful auction of telecom airwaves and huge spending cuts. “Well below the red line I had drawn last year,” as he glibly told Parliamentarians.

Critics however, point out that what was left unsaid was that the Government would roll-over the fourth quarter oil subsidy bill of around Rs 35,000 crore to the next financial year, in a sleigh of hand described as `routine’ for the past few years, to keep the deficit for this year under a lid. The petroleum subsidy being paid out in 2013-14 is Rs 85,480 crore. If the Rs 35,000 crore bill which has been rolled over to the next financial year is added, the real fuel subsidy bill would have been  Rs 1,20,000 crore !
However, at the same time the finance minister has set a tough target for his successor, of pruning the deficit to 4.1 per cent of GDP for the next fiscal, while drastically reducing the amount of money available as fuel subsidy. In effect, the next Government if it tries to live up to his targets will have to run against popular opinion and cut fuel subsidy drastically or else live beyond its means. The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore, of which Rs 35,000 crore will be spent on paying back subsidy due this fiscal ! In reality, this will leave the Government with just over Rs 28,000 crore to pay for the fuel subsidy for the whole financial year or about a fourth of what Chidambaram spent in a year on this count.

Stimulus : His and Mine

President Pranab Mukherjee
The finance minister’s other big announcement was of slashing of excise duty or ex-factory taxes on automobiles by a fifth to a third, which could make cars, motorcycles and sports utilities, cheaper. As well as duty cuts on capital and consumer goods from 12 per cent to 10 per cent and a slashing of duty on mobile phones from 6 to 1 per cent, if tax credit for inputs are not sought or 6 per cent with tax credits, was hailed by India’s industrial barons as  a `visionary stimulus’. The duty cuts will be available for a short period till end-June this year, possibly because a new full year budget will have to be presented by a new Government in June this year.
A number of media analysts are now gleefully pointing out that Chidambaram is replicating what his predecessor Pranab Mukherjee, now India’s President, did in 2009 when he cut excise by 4 per cent across the board. Uncomfortable for the finance minister who in the past had slammed “certain decisions that we took during the period 2009 to 2011,” (when Mukherjee was at the helm of affairs in the finance ministry) which he felt pushed the fiscal deficit upwards.

Both were gifting tax-give-aways, in the hope that it would reduce prices, revive demand and in turn bail out a faltering manufacturing sector which has been consistently shrinking for the last eight months.

Populism : Tough to Live Down

Budgets are always as much political statements as they are financial. Chidambaram tried to live up to that maxim with the few sops he announced. But more than that, he also announced sops which may prove to be financial booby-traps for his successor. Chidambaram promised a Rs 2,600 crore interest relief for 9 lakh students who took loans before end-March 2009, with the Government paying interest till end-December 2013. He also promised to to let old soldiers enjoy the benefit of a scheme which calls for `one rank, one pension’.  Some 2.4 million retired defence personnel were paid pension at differing rates depending on when they left service, creating heartburn among older soldiers.  
While this will cost him chicken feed in this financial year (an estimated Rs 500 crore), in coming years this will be a big ticket item in the defence expenditure budget and a source of headaches for Mandarins trying to balance books.

Right-drive Vision

However, the minister did more than lay out fiscal booby-traps for incoming ministers, he also laid out a long term vision for economic development with which his right-wing opponents in the BJP may have few or no quarrels. (Of course India’s Communist parties as well as regional parties would find this vision absolutely unacceptable on many grounds).
Among others, he sought reduction in fiscal deficit to 3 per cent by 2016-2017 obviously through deep subsidy cuts; a policy to encourage foreign investment without too many constraints; a balance in monetary and fiscal policies between price rise-busting and economic growth, which may mean that inflation which hits the poor more should be tolerated to let India grow faster; a slew of fiscal sector reforms which could open up banking and finance to more domestic and foreign investors; a stress on manufacturing and exports with state and central taxes on all exported goods either waived or slashed and tariff walls to incentivise domestic manufactures and most controversially - more centre-state sharing of spending on flagship programmes like job guarantee schemes and literacy. Currently these schemes are almost entirely under-written by the Centre. This move would certainly not win him any brownie points with the likes of Mamata Bannerjee or Nitish Kumar or for that matter even Karunanidhi.

Whether Chidambaram gets a chance to live through with his agenda for the future is however, something which the country would decide in the coming summer. But then the pointers will remain for the next finance minister to wade through.